The risk of contagion from multimarket contact |
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Authors: | Charles J Thomas Robert D Willig |
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Institution: | aDepartment of Economics, Clemson University, 222 Sirrine Hall, Clemson, SC 29634, USA;bDepartment of Economics, Princeton University, Fisher Hall, Princeton, NJ 08544, USA |
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Abstract: | It is conventional wisdom that the strategic linkage of markets that is enabled by multimarket contact typically increases the profitability of cooperation among rivals. We find to the contrary that a strong force against strategic linkage results from imperfect monitoring of adherence to cooperation. With such imperfections, strategically linking markets can lower payoffs by permitting the impact of adverse shocks in one market to spread to others. Consequently, players of repeated games on more than one front may find it strictly advantageous to avoid linking strategies on a front with clear monitoring to outcomes on a front with error-prone monitoring. One implication is that antitrust, competitive strategy, and foreign policy analyses have presumed too broadly that multimarket contact fosters cooperation. The game-theoretic equilibria characterized here shed light on why players such as firms and nations sometimes strategically link fronts in their rivalry, and sometimes take care to articulate that some fronts of particularly volatile conflicting interests will not trigger broader adverse moves against the rival. |
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Keywords: | Cooperation Multimarket contact Imperfect monitoring |
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