Private Observation, Tacit Collusion and Collusion with Communication

The paper studies the role of communication in facilitating collusion. The situation of infinitely repeated Cournot competition in the presence of antitrust enforcement is considered. Firms observe only their own production levels and a common market price. The price is assumed to have a stochastic component, so that a low price may signal either deviations from collusive output levels or a 'downward' demand shock. The firms choose between tacit collusion and collusion with communication. Communication implies that the firms meet and exchange information about past outputs and is assumed to be the only legal proof of cartel behavior. The antitrust enforcement takes the form of an exogenous probability to detect the meetings, in which case the firms are sued for cartel behavior and pay a fine. Tacit collusion is assumed to provide no grounds for the legal action but involves inefficiencies due to the lack of complete information about individual output levels. It is shown that there exists a range of discount factors where collusion with communication constitutes the most profitable collusive strategy.