Question

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

Answer 1

Solution: Taat collegion occurs where firme choose actions that are likely to minimize a response from another firm, Exi- 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 coordinate 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 will cooperate in the next period. while the probability of cooperation emerging is always ensitive there is a positive probability that cooperation never occur.

Antitrust and competition law has recognized that collation comes in two varieties i explicit and tacit. Explicit collusion involves express communication among the parties regarding the collusive agreement what outcome is to be supported and how it is to be sustained. Tacit collusion is, essentially , collusion by all other means. A common form of tacit collusion is indirect communication through price signalling. 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 featue' features. The seminal work of kreps at al(1982) examines Cooperation in a finitely repeated prisoner's Dilemma with uncertainity as to types. An irration type might be endowed with tit-for-tat or a preference for the cooperative action while a rational type optimizes unconstrain ned. If it was common knowledge that players were rational then the unique equilibricom has them Choose the uncooperative action in every period. con