On Tacit versus Explicit Collusion

Abstract

Antitrust law makes a sharp distinction between tacit and explicit collusion whereas the theory of repeated games -- the standard framework for studying collusion -- does not. In this paper, we study this difference in Stigler's (1964) model of secret price cutting. This is a repeated game with private monitoring since in the model, firms observe neither the prices nor the sales of their rivals. For a fixed discount factor, we identify conditions under which there are equilibria under explicit collusion that result in near-perfect collusion -- profits are close to those of a monopolist -- whereas all equilibria under tacit collusion are bounded away from this outcome. Thus, in our model, explicit collusion leads to higher prices and profits than tacit collusion.