Endogenous Monitoring in a Partnership Game
American Economic Review · 2020 · Volume 110 · Issue 3
Abstract
I consider a repeated game in which, due to imperfect monitoring, no collusion can be sustained. I add a self-interested monitor who commits to obtain private signals of firms' actions and sends a public message. The monitor makes an offer specifying the precision of the signals obtained and the amount to be paid in return. First, with a low monitoring cost, collusive equilibria exist. Second, collusive equilibria are monitor-preferred. Third, in monitor-preferred equilibria, firms' payoffs are decreasing in the discount factor. My model helps explain cartel agreements between self-interested parties and firms in legal industries in the United States and Europe.
Keywords
Stochastic and Dynamic Games, Evolutionary Games, Repeated Games, Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection, Asymmetric and Private Information, Mechanism Design, Monopoly, Monopolization Strategies
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