Leader-Driven Collusion

Abstract: Cartels are often organized around one or more firms that act as leaders and coordinate collusion. Motivated by these instances, I study optimal repeated-game equilibria in a market with a cartel leader and several competitors. Optimal collusive equilibria may involve an initial phase with gradually increasing prices, followed by a stationary phase in which prices are set at the monopoly level and market shares remain constant. These dynamics align with the behavior of several detected cartels, which initially exhibited gradual price increases. Methodologically, I use Lagrangian techniques to characterize Pareto optimal repeated-game equilibria for fixed (and possibly heterogeneous) discount factors.