Thursday, June 13, 2019

Multimarket Contact Under Imperfect Monitoring

Bingyong Zheng, Shanghai University of Finance and Economics - School of Economics studies Multimarket Contact Under Imperfect Monitoring.

ABSTRACT: This paper examines the effects of multimarket contact on collusive behaviors when firms are uncertain about rivals' past actions and IC constraint is violated in every single market. It shows that strategic linkages across markets relaxes the constraints imposed by discount factor on implicit agreements. In the basic model that assumes symmetric firms and markets, we find a spillover effect and an information aggregation effect from multimarket contact that has the potential to improve firms' abilities to collude. In an extended model with asymmetric markets, a cross-subsidization effect reinforces the two effects and relaxes the incentive constraints governing collusive agreements. Thus, contrary to common belief, neither asymmetry nor perfect monitoring is necessary for mutual forbearance.

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