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Problem Set 8.3

The document describes a problem set involving two rice wholesalers, B and G, who supply rice to a market each day. They realize they are playing an infinitely repeated game where they simultaneously set supply levels each morning based on previous days. The wholesalers want to tacitly collude by having B supply 10 quintals and G supply 4 quintals daily. For this collusive outcome to be sustained, there are two "collusion constraints", determined by the daily interest rate ρ, that must be satisfied. The problem is to determine the two constraints and the values of ρ that allow both constraints to be met.

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sumit jha
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50 views

Problem Set 8.3

The document describes a problem set involving two rice wholesalers, B and G, who supply rice to a market each day. They realize they are playing an infinitely repeated game where they simultaneously set supply levels each morning based on previous days. The wholesalers want to tacitly collude by having B supply 10 quintals and G supply 4 quintals daily. For this collusive outcome to be sustained, there are two "collusion constraints", determined by the daily interest rate ρ, that must be satisfied. The problem is to determine the two constraints and the values of ρ that allow both constraints to be met.

Uploaded by

sumit jha
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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PROBLEM SET 8.

3 – ON TACIT COLLUSION

Reconsider Question 1 in Problem Set 7.2, where two whole-sellers, B and G, supply rice (of
identical quality) to a whole-sale rice market every day. Take as given all data about the
game from Question 1 in Problem Set 7.2, and consider the case: F = 0, uB = 30, and uG = 36.
In contrast to Question 1 in Problem Set 7.2, suppose (more realistically) that every morning,
the sellers simultaneously determine their supplies for the day. So day after day, individual
firm supplies can be changed based on what has happened in previous days. This goes on
forever, and consequently, the whole-sellers realize that they are playing an infinitely
repeated game against each other. The daily interest rate is , and there is no inflation.
Suppose that the two firms want to tacitly sustain the following collusive outcome: “seller B
supplies 10 quintals of rice every day, and seller G supplies 4 quintals of rice every day”, by
using the threat of ‘perpetual one-shot Nash reversion’.
Determine the ‘two collusion constraints’ that the two (asymmetric) whole-sellers face. For
what values of  – the daily market interest rate – will both the collusion constraints be
satisfied?

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