Communication, Renegotiation, and the Scope for Collusion

55 Pages Posted: 17 Feb 2010

See all articles by David J. Cooper

David J. Cooper

Florida State University - Department of Economics; University of East Anglia (UEA) - Centre for Behavioural and Experimental Social Science (CBESS)

Kai-Uwe Kuhn

University of East Anglia (UEA) - Centre for Competition Policy; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2, 2010

Abstract

We use experiments to analyze what type of communication is most effective in achieving cooperation in a simple collusion game. Consistent with the theories of collusion and cheap talk, an initial burst of collusion rapidly collapses if subjects can only use a limited message space that does not allow communication of contingent strategies. When unlimited pre-game communication is allowed, a similar initial decline in collusion reverses over time. Content analysis is used to identify multiple channels by which communication improves collusion in this setting. Explicit threats to punish cheating are the most important factor to successfully establish collusion, consistent with the theory. Surprisingly, collusion is even more likely when we allow for renegotiation, contrary to standard theories of renegotiation. With renegotiation cheaters are often admonished in strong terms. Allowing renegotiation therefore appears to increase collusion by allowing for an inexpensive and highly effective form of punishment.

Keywords: experiments, industrial organization, collusion, communication, oligopoly

JEL Classification: C73, C92, L13, L41

Suggested Citation

Cooper, David J. and Kuhn, Kai-Uwe, Communication, Renegotiation, and the Scope for Collusion (January 2, 2010). Available at SSRN: https://ssrn.com/abstract=1553429 or http://dx.doi.org/10.2139/ssrn.1553429

David J. Cooper (Contact Author)

Florida State University - Department of Economics ( email )

Tallahassee, FL 30306-2180
United States

University of East Anglia (UEA) - Centre for Behavioural and Experimental Social Science (CBESS) ( email )

United Kingdom

Kai-Uwe Kuhn

University of East Anglia (UEA) - Centre for Competition Policy ( email )

UEA
Norwich Research Park
Norwich, Norfolk NR47TJ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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