Partial Communication and Collusion with Demand Uncertainty

This paper analyzes the role of communication between firms in an infinitely repeated Bertrand game in which firms receive an imperfect private signal of a common value i.i.d. demand shock. Communication allows firms to coordinate on the most collusive price and it eliminates the possibility of undetectable price cuts. It is shown that firms can use stochastic intertemporal market sharing as a perfect substitute for communication in low demand states. Therefore, partial communication in high demand states is sufficient to achieve the first-best, full communication outcome. And partial communication in low demand state does not improve on the equilibrium without communication. Communication is most valuable to firms if signal frequency is intermediate, demand is characterized by upward shocks and the number of firms is neither too small nor too large. JEL-classification: L41, L13, D82