We study the ability of several identical firms to collude in the presence of a more efficient firm, which does not take part in their collusive agreement. The cartel firms adopt stick-and-carrot strategies, while the efficient firm plays its one-period best-response function, regardless of the history of play. We characterize the most collusive symmetric punishment, which maximizes the scope for collusion. We then find that either a lower cost disadvantage or a smaller cartel size facilitates collusion. Finally, we compare our results with those obtained in the standard setup where all firms participate in the collusive agreement.
On the difficulty of collusion in the presence of a more efficient outsider
3 April 2018