Friday, May 17, 2019
Yu Awaya, University of Rochester and Vijay Krishna, Penn State University study Information Exchange in Cartels.
ABSTRACT: Antitrust authorities view the exchange of detailed information among firms regarding costs, prices or sales as being potentially anti-competitive. The reason is that such exchanges may allow competitors to closely monitor each other, thereby facilitating greater coordination. But the exchange of aggregate information, perhaps via a third party like a trade association, is legal. The logic, supported by theory, is that collusion is difficult if the identity of a price cutting firm cannot be ascertained. In this paper, we examine this logic in the framework of Stiglers (1964) model of secret price cuts. We first identify circumstances such that when no information exchange is possible, collusion is very difficult. We then study a situation in which firms' aggregate sales are made public by a third party and show that even this limited information can allow firms to collude --- there are equilibria with profits that are close to those of a monopolist. We also study the incentives of firms to report their sales truthfully to the third party.