Collusion by asymmetrically informed duopolists

Abstract

We investigate the possibility of incentive compatible and individually rational collusion in a duopolistic industry in which each firm knows its own costs but not the cost of the other firm. Sidepayments are assumed to be possible, and two forms of individual rationality constraints, ‘interim’ and ‘ex post’ are considered. We describe the restrictions imposed on the sidepayments by each from of the individual rationality conditions and by the incentive compatibility conditions. We demonstrate that it is possible to devise sidepayment schemes that simultaneously satisfy the incentive compatibility constraints and the interim individual rationality constraints. We also demonstrate that it is possible to devise sidepayment schemes that simultaneously satisfy the incentive compatibility constraints and the ex post individual rationality constraints. We finally demonstrate that, in general, it may not be possible to devise sidepayments that simultaneously satisfy both forms of the individual rationality constraints.