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How Demand Information Can Destabilize a Cartel

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Abstract

This paper studies a symmetric Bertrand duopoly with imperfect monitoring where firms receive noisy public signals about the state of demand. These signals have two opposite effects on the incentive to collude: avoiding punishment after a low-demand period increases collusive profits, making collusion more attractive, but it also softens the threat of punishment, which increases the temptation to undercut the rival. There are cases where the latter effect dominates, and so the collusive equilibrium does not always exist when it does absent demand information. These findings are related to the Sugar Institute Case studied by Genesove and Mullin (2001).

Suggested Citation

  • Liliane Karlinger, 2008. "How Demand Information Can Destabilize a Cartel," Vienna Economics Papers vie0803, University of Vienna, Department of Economics.
    • Handle: RePEc:vie:viennp:vie0803
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    References listed on IDEAS

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    1. Fuller, Stephen W. & Ruppel, Fred J. & Bessler, David A., 1990. "Effect Of Contract Disclosure On Price: Railroad Grain Contracting In The Plains," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 15(2), pages 1-7, December.
    2. Cason, Timothy N & Mason, Charles F, 1999. "Information Sharing and Tacit Collusion in Laboratory Duopoly Markets," Economic Inquiry, Western Economic Association International, vol. 37(2), pages 258-281, April.
    3. David Genesove & Wallace P. Mullin, 2001. "Rules, Communication, and Collusion: Narrative Evidence from the Sugar Institute Case," American Economic Review, American Economic Association, vol. 91(3), pages 379-398, June.
    4. Robert H. Porter, 1983. "A Study of Cartel Stability: The Joint Executive Committee, 1880-1886," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 301-314, Autumn.
    5. Natalia Fabra, 2003. "Tacit Collusion in Repeated Auctions: Uniform Versus Discriminatory," Journal of Industrial Economics, Wiley Blackwell, vol. 51(3), pages 271-293, September.
    6. Raith, Michael, 1996. "A General Model of Information Sharing in Oligopoly," Journal of Economic Theory, Elsevier, vol. 71(1), pages 260-288, October.
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    More about this item

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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