How Demand Information Can Destabilize a Cartel

Abstract

This paper studies a symmetric Bertrand duopoly with imperfect mon- itoring where rms receive noisy public signals about the state of demand. These signals have two opposite eects on the incentive to collude: avoid- ing punishment after a low-demand period increases collusive prots, mak- ing collusion more attractive, but it also softens the threat of punishment, which increases the temptation to undercut the rival. There are cases where the latter eect dominates, and so the collusive equilibrium does not always exist when it does absent demand information. These ndings are related to the Sugar Institute Case studied by Genesove and Mullin (2001).