The role of demand information and monitoring in tacit collusion


  • I am extremely thankful to Catherine Eckel for her support and constructive comments. I am particularly indebted to Joe Harrington for all the time spent in helping me improve this article and for his encouragement. I am grateful to Matt Parrett and Zhongmin Wang for their detailed and thoughtful comments, which significantly improved the article. I also thank, Vince Crawford, Chetan Dave, Ernan Haruvy, Igal Hendel, Tom Hubbard, John Spraggon, John Stranlund, Bart Wilson, Alex Yuskavage, and several referees for their suggestions. Sheryl Ball provided grant administration support. Francesca Colantuoni and Chris Burns provided valuable research assistance. Funding was provided by the National Science Foundation (grant no. SES-0526229) and by the University of Massachusetts at Amherst (Department of Resource Economics and Healy grant no. 135573).


Motivated by the Green and Porter (1984) and Rotemberg and Saloner (1986) models, we construct lab experiments to test the effects of two factors on collusion: information (regarding next period's demand state) and monitoring (of a rival's past action). Results indicate that information may facilitate collusion more than monitoring, especially as subjects gain experience. A robust finding is that subjects in the Rotemberg and Saloner treatment cooperate as predicted by this theory: collusion falls dramatically in anticipation of unusually large demand and returns to high levels otherwise. These results suggest that tacit and fairly elaborate collusion could arise in stochastic environments.