Price Cutting and Business Stealing in Imperfect Cartels
Though economists have made substantial progress toward formulating theories of collusion in industrial cartels that account for a variety of fact patterns, important puzzles remain. Standard models of repeated interaction formalize the observation that cartels keep participants in line through the threat of punishment, but they fail to explain two important factual observations: first, apparently deliberate cheating actually occurs; second, it frequently goes unpunished even when it is detected. We propose a theory of "equilibrium price cutting and business stealing" in cartels to bridge this gap between theory and observation.
We would like to thank Susan Athey, Kyle Bagwell, Lanier Benkard, Jeremy Bulow, Ben Golub, Leslie Marx, David McAdams, Andy Skrzypacz, Takuo Sugaya, Robert Wilson, and Alex Wolitsky for valuable discussions and feedback. We are especially indebted to Jonathan Levin for insightful guidance that helped to shape the project at critical stages. We are also grateful for comments by seminar participants at Stanford University, Stanford GSB, and the 12th Columbia/Duke/MIT/Northwestern IO theory conference. Both authors acknowledge financial support from the National Science Foundation. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
B. Douglas Bernheim & Erik Madsen, 2017. "Price Cutting and Business Stealing in Imperfect Cartels," American Economic Review, vol 107(2), pages 387-424. citation courtesy of