Collusion in a buyer–seller network formation game

Abstract

We study collusive behavior in a simple finitely repeated buyer–seller network formation game. There is one seller and two potential buyers who simultaneously decide on which link(s) to form. A link represents a trading opportunity between a seller and a buyer and is formed if both offer it. If the seller is linked to both buyers, the seller gets the entire surplus. If the seller is linked to only one buyer, the linked buyer gets a small share of the surplus and the seller has the larger share. Link costs are incurred when the link is established. We study two levels of link costs: zero and positive. The competitive network is the outcome of undominated strategy play only with zero link costs. In both link cost levels, the only way both buyers can earn strictly positive payoffs is by turn taking. We find evidence that both the buyers and the seller facilitate tacit collusion, regardless of the payoff structure. The proportions of groups that engage in collusion and turn taking do not seem to depend on the payoff structure.