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Optimal Collusion with Private Information

Susan Athey and Kyle Bagwell
The RAND Journal of Economics
Vol. 32, No. 3 (Autumn, 2001), pp. 428-465
Published by: Wiley on behalf of RAND Corporation
Stable URL: http://www.jstor.org/stable/2696363
Page Count: 38
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Optimal Collusion with Private Information
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Abstract

We analyze collusion in an infinitely repeated Bertrand game, where prices are publicly observed and each firm receives a privately observed, i. i.d. cost shock in each period. Productive efficiency is possible only if high-cost firms relinquish market share. In the most profitable collusive schemes, firms implement productive efficiency, and high-cost firms are favored with higher expected market share in future periods. If types are discrete, there exists a discount factor strictly less than one above which first-best profits can be attained using history-dependent reallocation of market share between equally efficient firms. We also analyze the role of communication and side-payments.

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