Author: Do, Jihwan

Abstract:This paper provides a theoretical explanation of “cheating and compensation on-path of play” using a canonical repeated game model of price-fixing collusion. The novel mechanism relies on firms playing mixed strategies allowing for both the monopoly price and undercutting the monopoly price to happen with positive probability, together with a compensation scheme that punishes a price-cutter. For an intermediate range of discount factors, the mechanism is optimal in a restricted class of equilibria, and such price-cutting and compensation are necessary parts for any symmetric collusive equilibrium.

This article will be officially published in the Journal of Economic Theory Volume 200 in March 2022. The journal is a category A journal of the School of Economics and Management.

Paper link: https://doi.org/10.1016/j.jet.2021.105382‍