Impossibility of Collusion under Imperfect Monitoring with Flexible Production

Impossibility of Collusion under Imperfect Monitoring with Flexible Production

American Economic Review. December
2007, Vol. 97, Issue 5, Pages 1794–1823

We show that it is impossible to achieve collusion in a duopoly when (a) goods are homogenous and firms compete in quantities; (b) new, noisy information arrives continuously, without sudden events; and (c) firms are able to respond to new information quickly. The result holds even if we allow for asymmetric equilibria or monetary transfers. The intuition is that the flexibility to respond quickly to new information unravels any collusive scheme. Our result applies to both a simple stationary model and a more complicated one, with prices following a mean-reverting Markov process, as well as to models of dynamic cooperation in many other settings.