The critical discount factor as a measure for cartel stability?

Abstract

This paper considers the stability of tacit collusion in price setting duopolies with repeated interaction. The minimum discount factor above which tacit collusion can be sustained in a subgame perfect equilibrium is called the critical discount factor delta*. In addition, delta* is often used as an intuitive measure for the stability of a tacit cartel, assuming that a collusive equilibrium is more difficult to sustain when delta* increases. However, according to standard theory the distance delta - delta* between the actual and the critical discount factor does not matter for stability as long as delta > delta*. This paper contributes experimental evidence that supports the intuitive idea that a larger critical discount factor makes collusion a less likely outcome.