Abstract
Cost asymmetry is generally thought to hinder collusion because a more efficient firm has both more to gain from deviations and less to fear from retaliation than less efficient firms. Our paper reexamines this conventional wisdom and characterizes optimal collusion without any prior restriction on the class of strategies. We stress that firms can credibly agree on retaliation schemes that maximally punish even the most efficient firm. This implies that whenever collusion is sustainable under cost symmetry, some collusion is also sustainable under cost asymmetry; efficient collusion, however, remains more difficult to sustain when costs are asymmetric. Finally, we show that in the presence of side payments cost asymmetry facilitates collusion.
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This paper is based on chapter 2 of my doctoral dissertation at the University of Toulouse 1, written under the guidance of Patrick Rey. I thank co-editor Dan Kovenock, two anonymous referees, Mohamed Belhaj, Bruno Jullien, Ulrich Kamecke, Joe Harrington, and participants of the 2004 WZB/CEPR “Collusion and Cartels” conference, the Econometric Society World Congress 2005, and the European Winter Meeting of the Econometric Society 2005 for feedback and helpful comments.
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Miklós-Thal, J. Optimal collusion under cost asymmetry. Econ Theory 46, 99–125 (2011). https://doi.org/10.1007/s00199-009-0502-9
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DOI: https://doi.org/10.1007/s00199-009-0502-9