Cartel Enforcement with Uncertainty About Costs

Abstract

What cartel agreements are possible when firms have private information about production costs? In order for a cartel agreement to work it must take into account the incentives for firms to misrepresent their cost information and it must provide sufficient reward so that no firm wishes to defect. For private cost uncertainty we characterize the set of cartel agreements with side payments that can be supported as Bayesian Nash equilibria. We show that if defection results in either Cournot or Bertrand competition the incentive problems in large cartels are severe enough to prevent the cartel from achieving the monopoly outcome. In contrast, with common cost uncertainty, the incentive problems become less severe in large cartels, allowing perfect collusion.