Wednesday, July 23, 2014

Institutional Authority and Collusion

Axel Sonntag (University of East Anglia) and Daniel John Zizzo (University of East Anglia) discuss Institutional Authority and Collusion.

ABSTRACT: A 'collusion puzzle' exists by which, even though increasing the number of firms reduces the ability to tacitly collude, and leads to a collapse in collusion in experimental markets with four or more firms, in natural markets there are such numbers of firms colluding successfully. We present an experiment showing that, if managers are deferential towards an authority, firms can induce more collusion by delegating production decisions to middle managers and providing suitable informal nudges. This holds not only with two but also with four firms. We are also able to distinguish compliance effects from coordination effects from the nudges.

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