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IESE Research Papers,
IESE Business School

No D/674: Stochastic market sharing, partial communication and collusion

Heiko Gerlach ()
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Heiko Gerlach: IESE Business School, Postal: Research Division, Av Pearson 21, 08034 Barcelona, SPAIN

Abstract: This paper analyzes the role of communication between firms in an infinitely repeated Bertrand game in which firms receive an imperfect private signal of a common value i.i.d. demand shock. It is shown that firms can use stochastic, inter-temporal market sharing as a perfect substitute for communication in low-demand states. Therefore, partial communication in high-demand states is sufficient to achieve the most collusive, full communication outcome. And partial communication in low-demand states does not improve on the equilibrium without communication. Communication in high-demand states allows firms to coordinate their pricing, choose the most efficient uninformed price and avoid price wars. I demonstrate that under some conditions consumers are better off with communication among colluding firms.

Keywords: Stochastic market sharing; communication; collusion; competition policy

JEL-codes: D82; L13; L41

32 pages, January 21, 2007

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