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On the Difficulty of Collusion in the Presence of a More Efficient Outsider

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We study the ability of several identical firms to collude in the presence of a more efficient firm, which does not take part in their collusive agreement. The cartel firms adopt stick-and-carrot strategies, while the efficient firm plays its one-period best-response function, regardless of the history of play. We characterize the most collusive symmetric punishment, which maximizes the scope for collusion. We then find that either a lower cost disadvantage or a smaller cartel size facilitates collusion. Finally, we compare our results with those obtained in the standard setup where all firms participate in the collusive agreement. (JEL: C73, D43, L13)
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Keywords: cost asymmetry; optimal punishments; outsider; repeated game; tacit collusion

Appeared or available online: 09 January 2018

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