DP8877 Flexibility and Collusion with Imperfect Monitoring

Author(s):	Maria Bigoni, Jan Potters, Giancarlo Spagnolo
Publication Date:	March 2012
Keyword(s):	Collusion, Cooperation, Flexibility, Imperfect monitoring, Oligopoly, Repeated games.
JEL(s):	C73, C92, D43, L13, L14
Programme Areas:	Industrial Organization
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=8877

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.