Faking Patience with Tacit Collusion

Abstract

This paper analyzes coordination in tacit collusion when firms’ discount factor is private information. We consider an infinitely repeated duopoly where two states of the world randomly occur, with different incentives for collusion. Depending on its own discount factor, a firm chooses cooperative behavior in both states (patient), in none of the states (impatient) or in one state (mildly patient). The presence of different states affects the strategic role of beliefs. A mildly patient firm has an incentive in “faking patience” to get the deviation profit. Interestingly, this effect prevents or delays collusion when the belief in patience is strong.