Premium
IMPERFECT INFORMATION AND THE CHOICE BETWEEN COLLUSION AND HORIZONTAL MERGER
Author(s) -
Fraja G.
Publication year - 1990
Publication title -
metroeconomica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.256
H-Index - 29
eISSN - 1467-999X
pISSN - 0026-1386
DOI - 10.1111/j.1467-999x.1990.tb00463.x
Subject(s) - collusion , stochastic game , economics , merge (version control) , commit , term (time) , microeconomics , contractible space , imperfect , mathematical economics , perfect information , outcome (game theory) , econometrics , computer science , mathematics , linguistics , philosophy , physics , quantum mechanics , database , combinatorics , information retrieval
If the payoff obtained by the parties of an agreement depends on the values set for variables the value of which cannot be described precisely or monitored accurately, then the first best outcome may not be achieved. It is shown here that in some cases a second best long term agreement gives the parties a higher payoff, in other cases a short term arrangement is preferred. The interpretation of this result given in the paper is that when a long term contract is preferable, then firms are unable to commit themselves to it through a collusive agreement, and they will try to merge. Vice versa, no need to integrate arises when the preferred second best agreement is the short term one. The last section provides an example, where advertisement effort is non‐contractible, while prices are.