Discussion Paper Details

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Title: Flexibility and Collusion with Imperfect Monitoring

Author(s): Maria Bigoni, Jan Potters and Giancarlo Spagnolo

Publication Date: March 2012

Keyword(s): Collusion, Cooperation, Flexibility, Imperfect monitoring, Oligopoly and Repeated games.

Programme Area(s): Industrial Organization

Abstract: Flexibility - the ability to react swiftly to others' choices - facilitates collusion by reducing gains from defection before opponents react. Under imperfect monitoring, however, flexibility may also hinder collusion by inducing punishment after too few noisy signals. The combination of these forces predicts a non-monotonic relationship between flexibility and collusion. To test this subtle prediction we implement in the laboratory an indefinitely repeated Cournot game with noisy price information and vary how long players have to wait before changing output. We find that (i) the facilitating role of flexibility is lost under imperfect monitoring, and (ii) with learning, collusion unravels with low or high flexibility, but not with intermediate flexibility.

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Bibliographic Reference

Bigoni, M, Potters, J and Spagnolo, G. 2012. 'Flexibility and Collusion with Imperfect Monitoring'. London, Centre for Economic Policy Research.