Frequency of interaction, communication and collusion: an experiment (W.P, Version)

G. Spagnolo, M. Bigoni and J. Potter’s, forth. coming in Economic Theory 2018, 120(3): 826-858

Abstract: The frequency of interaction facilitates collusion by reducing gains from defection. Theory has shown that under imperfect monitoring flexibility may hinder cooperation by inducing punishment after too few noisy signals, making collusion impossible in many environments (Sannikov and Skrzypacz in Am Econ Rev 97:1794–1823, 2007). The interplay of these forces should generate an inverse U-shaped effect of flexibility on collusion. We test for the first time these theoretical predictions—central to antitrust policy—in a laboratory experiment featuring an indefinitely repeated Cournot duopoly, with different degrees of flexibility. Results turn out to depend crucially on whether subjects can communicate with each other at the beginning of a supergame (explicit collusion) or not (tacit collusion). Without communication, the incidence of collusion is low throughout and not significantly related to flexibility; when subjects are allowed to communicate, collusion is more common throughout and significantly more frequent in the treatment with intermediate flexibility than in the treatments with low or high flexibility.

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