Asymmetric Information, Communication, and Cartel Instability

Atin Basu Choudhary, Virginia Military Institute
John Conlon, University of Mississippi

Abstract

This paper studies the effect of asymmetric information about demand on cartel stability. In this model, firms in a cartel face fluctuating demand in a repeated game framework. In each period, one firm knows current demand, and is expected to communicate this information to its partners. Cartels are then unstable for two reasons. First, as is well known, when demand is high the benefit from cheating is relatively large compared to the expected rewards of future cooperation. Second, when demand is high, the informed firm can mislead the uninformed firms to reduce output relative to the actual state of demand. However, if the informed firm chooses not to share this information in the collusive equilibrium then cartels are as stable as when there is no demand fluctuation.