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3 - Collusion in growing and shrinking markets: empirical evidence from experimental duopolies

Published online by Cambridge University Press:  04 December 2009

By
Klaus Abbink  and
Jordi Brandts
Edited by
Jeroen Hinloopen
Afterword by
Hans-Theo Normann
Jeroen Hinloopen
Affiliation:
Universiteit van Amsterdam
Hans-Theo Normann
Affiliation:
Royal Holloway, University of London
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Summary

In this chapter we study collusive behavior in experimental duopolies that compete in prices under dynamic demand conditions. In one treatment the demand grows at a constant rate. In the other treatment the demand declines at another constant rate. The rates are chosen so that the evolution of the demand in one case is just the reverse in time than the one for the other case. We use a box-design demand function so that there are no issues of finding and coordinating on the collusive price. Contrary to game-theoretic reasoning, our results show that collusion is significantly larger when the demand shrinks than when it grows. We conjecture that the prospect of rapidly declining profit opportunities exerts a disciplining effect on firms that facilitates collusion and discourages deviation.

Introduction

Game-theoretic analysis of price competition suggests that collusion will arise more easily in growing than in declining markets. Tacitly collusive agreements involve that deviations from the collusive path trigger retaliations by other firms, such that, from that point on, the deviating firm's profits will be lower than if it had stuck to the agreed behavior. When the demand grows steadily the gains from deviating from the collusive agreement are, at any point in time, small in comparison to the future losses from retaliation. Analogously, when the demand keeps shrinking these losses will be relatively small compared to the short-term gains from deviations.

Type
Chapter
Information
Experiments and Competition Policy , pp. 34 - 60
Publisher: Cambridge University Press
Print publication year: 2009

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