Optimal Collusion under Cost Asymmetry

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.