Question

What is "tacit collusion" and explain how it relates to the concept of a repeated prisoner's dilemma game?

Answer 1

Ans. Tacit collusion occurs where firms choose actions that are likely to minimize a response from another firm, eg. avoiding the opportunity to price cut an opposition because it would cause the opposition to retaliate. Put another way, two firms agree to play a certain strategy without explicitly saying so. Tacit collusion is best understood in the context of a duopoly and the concept of game theory, namely Nash equilibrium. In the context of an infinitely repeated Prisoners Dilemma, one can explore how cooperation is initiated when players communicate and coordinte through their actions. There are two types of players-patient and impatient- which are private information. An important type is incapable of cooperative play, while if both players are patient types - and this is common knowledge - then they can cooperate with a grim trigger strategy. We find that the longer that players have gone without cooperating, the lower is the probability that they'll cooperate in the next period. While the probability of cooperation emerging is always positive, there is a positive probability that coopertion never occur. Antitrust and competition law has recoganized that collusion comes in two varieties: explicit and tacit. Explicit collusion involves express communication among the parties regarding the collusive agrement - what outcome is to be supported and how it is to be sustained. Tacit collusion is, essentilly, collusion by all other means. A common form of tacit collusion is indirect communication through price signaling. To our knowledge, there is no previous work which seeks to model the dynamic process by which players coordinate on cooperative play in a game with conflict. However, there are analyses that have some related features. The seminal work of Kreps et al [1982] examines cooperation in a finitely repeted Prisoner's Dilemma with uncertanity as to types. An irrtional type might be endowed with tit-for-tat or a preference for the cooperative action while a rational type optimizes unconstrained. If it was common knowledge that players were rational then the unique equilibrium has them choose the uncooperative action in every period.