Cartel Enforcement with Uncertainty About Costs
What cartel agreements are possible when firms have private information about productions costs? For private cost uncertainty we characterize the set of cartel agreements that can be supported, recognizing incentive and participation constraints. If defection results in either Cournot or Bertrand competition, the incentive problem in large cartels is severe enough to prevent the cartel from achieving the monopoly outcome. However if the cartel agreement requires less than unanimous ratification by the member firms, then the incentive problem can be overcome in large cartels. With common cost uncertainty, perfect collusion is possible in large cartels, regardless of the ratification rule.
© 1990 The Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association. We would like to thank Richard Kihlstrom, Robert Porter, two anonymous referees and participants of seminars at University of Pennsylvania, Stanford University, Bell Communications Research, Princeton University, and University of California, Berkeley for valuable comments. We are grateful to Northwestern University for their hospitality and to the Sloan Foundation and the National Science Foundation for their support.