Communication, Renegotiation, and the Scope for Collusion
55 Pages Posted: 17 Feb 2010
Date Written: January 2, 2010
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: Suggested Citation