A theory of collusion with partial mutual understanding |
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| Institution: | 1. The Federmann Center for the Study of Rationality and the Institute of Mathematics, The Hebrew University of Jerusalem, Jerusalem 91904, Israel;2. Department of Quantitative Economics, Maastricht University, Maastricht, The Netherlands;1. University of Birmingham Microbiome Treatment Centre, Birmingham, UK;2. University Hospitals Birmingham NHS Foundation Trust, Birmingham, UK;3. Institute of Cancer and Genomic Sciences, University of Birmingham, UK;4. Institute of Microbiology and Infection, University of Birmingham, UK |
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| Abstract: | Unlawful collusion is when firms have a mutual understanding to coordinate their behavior for the purpose of achieving a supracompetitive outcome. Given the legal focus on mutual beliefs, this paper explores the role of mutual beliefs in producing collusion. Focusing on price leadership, firms are assumed to commonly believe that price increases will be at least matched but lack any shared understanding about who will lead, when they will, and at what prices. Sufficient conditions are derived which ensure that supracompetitive prices emerge. However, price is bounded below the maximal equilibrium price. |
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| Keywords: | Collusion Price leadership Epistemic game theory |
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