The scope for collusion under fractional defections

Abstract

This paper examines the scope for firms to collude in an oligopoly supergame, when firms defect by producing a fraction of their best response outputs. Such deviations from the collusive equilibrium are termed “fractional defections.” We show that the joint profit maximizing output level cannot be sustained under fractional defections and identify the most collusive output level. The paper also investigates the ability of firms to collude as both demand and the number of firms in the industry vary. The results reveal that the degree of collusion is inversely related to the level of demand and that high levels of concentration may in fact be inimical to collusion.