ALTERNATING MONOPOLY AND TACIT COLLUSION

This paper considers the use of the alternating monopoly strategy (AMS) as a (tacit) collusion device. We show that firms may choose this strategy in particular environments, when other collusive strategies are also feasible. In particular, we stress how the presence of an observable move (entry), distinct from the competitive stage (price setting), can serve as a coordination device, reducing monitoring costs in incomplete information environments. The paper thus shows that AMS may be preferable to the classic market sharing strategy (MSS) and in some cases it is the only collusive equilibrium.