Collusion / Cooperation
When competitive market outcomes are not desirable, say because the production process generate negative (e.g. environmental) externalities, the ability of firms to cooperate is essential for society to escape the negative consequences of competition.
Conversely, when competition yields socially efficient outcomes, it is fundamental to be sure that firms cannot escape market pressure by colluding.
Collusion is illegal in most countries. It is jointly rational for firms, but generally not individually so. Thus it is usually sustained by punishing strategies to induce firms to stick to the agreed upon (collusive) strategies.
Circumstances in which collusion is more likely to arise are studied for years. With Laurent Flochel and Bruno Versaevel, we enrich this literature by studying the role of limited liability constraints.
- "Optimal Collusion with Limited Liability"
we prove that, by limiting the ability of firms to punish their competitor in case of a deviation from a (tacit) collusive agreement, liability constraints may actually result in collusion being more difficult to sustain.
You find the corresponding slides behind this link.