ABSTRACT: We explore the effects of asymmetries in capacity constraints on collusion where demand is uncertain and where firms must monitor the agreement through their privately observed sales and prices. We show that deviations will be detected perfectly when demand fluctuations are sufficiently small. Otherwise, monitoring is imperfect and punishment phases must occur on the equilibrium path. Collusion is hindered in both cases when the largest firm has more capacity and when the smallest firm has less. We demonstrate that a merger with a collusive symmetric outcome can have a lower average best equilibrium price than a more asymmetric non-collusive outcome.
KEYWORDS: Collusion, mergers, imperfect monitoring, merger policy
CITATION: Garrod, L. & Olczak, M. (2014) "Collusion under Private Monitoring with Asymmetric Capacity Constraints", CCP Working Paper 14-4.