Communication and side payments in a duopoly with private costs: An experiment

Abstract

We design an experiment to examine the role of chat communication and side payments in facilitating collusion and fostering productive efficiency in repeated Bertrand duopoly markets. Sellers in the experiment are privately informed about their costs, which are randomly drawn every period. When side payments are feasible, theory predicts that a seller with a low cost will offer a side payment to a high cost rival for the high cost seller to stay out of the market. The low cost seller then proceeds to serve the entire market at the monopoly price, thereby achieving both joint profit maximization and productive efficiency. In the experiment, we find that prices are higher when sellers are allowed to engage in chat communication and when they choose to use side payments. However, the mere availability of the side payment option does not lead to greater collusion and side payments have a weakly positive effect on productive efficiency.