Week 5 Flashcards
What is the difference between explicit and tacit collusion?
-Explicit collusion is arrived at cooperatively (mostly illegal)
-Tacit collusion is arrived at non-cooperatively, meaning firms are not bound by any agreement
What are the 4 notations for game theory collusion?
TTm = each firm’s share of per-period monopoly profit
TTduo = each firm’s per-period duopoly profit
TT1 = one period profit from defection
TT0 = one period profit when rival defects
What is the order of profits from biggest to smallest?
1) TT1
2) TTm
3) TTduo
4) TT0
What is the trigger strategy in repeated game theory?
-Play collude until a rival competes
-When/if a rival competes, revert to compete for all remaining periods
-Weigh up short-term gains from defection vs long-term collusive profits
In a duopoly, what is the present value of a firm, following a trigger strategy?
Vts = (1/r) * TTm
In duopoly, what is the present value of defecting, following the trigger strategy?
(1/(1+r))TT1 + (1/(1+r))(1/r)TTduo
What is the sustainability condition?
1/r > (TT1-TTm)/(TTm-TTduo)
What is the sustainability condition?
1/r > (TT1-TTm)/(TTm-TTduo)
What are the complications with the trigger strategy?
-After you defect, can I commit to playing compete forever?
-Prices are not the perfect signals of defection
-Consider a threshold range for defection
In n-firm collusion, what changes to the 4 TT’s?
-TTo = 0
-TTduo = 0
-TTm = Industry profits/n
-TT1 = Industry profits
What is the sustainability condition for n-firms?
1/r > n-1
As n increases, collusion is more likely to fail
Explain the issues with Cartels:
-Heterogenous economies of scale may break the cartel
-Firms are not identical and have different costs/products/markets/etc
-Further issues contain entry costs, industry growth rates, changes in technology, size and frequency of individual transactions
What is backward induction?
The equilibrium in the last period is compete irrespective of past collusion
We can solve by adding no final period, uncertainty over final period/payoffs
