Monday, April 15, 2013
Posted by D. Daniel Sokol
Atin Basuchoudhary Virginia Military Institute, and John R. Conlon, University of Mississippi argue that Silence is golden: communication, silence, and cartel stability.
ABSTRACT: This paper studies how cartel stability is influenced by asymmetric information and communication about demand. Firms in a cartel face fluctuating demand in a repeated game framework. In each period, one randomly chosen firm knows current demand. In this context we consider two different equilibria -- one where the informed firm communicates its information to its partners and another where it does not. We show that cartels are extremely unstable when the informed firm communicates with the uninformed firms. However, when the informed firm does not communicate with the uninformed firms cartels can be as stable as when there are no demand fluctuations at all.