How Is Cooperation/Collusion Sustained in Repeated Multimarket Contact with Observation Errors?

This paper analyzes repeated multimarket contact with observation errors where two players operate in multiple markets simultaneously. Multimarket contact has received much attention from the literature of economics,management, and information systems. Despite vast empirical studies that examine whether multimarket contact fosters cooperation/collusion, little is theoretically known as to how players behave in an equilibrium when each player receives a noisy observation of other firms’ actions. This paper tackles an essentially realistic situation where the players do not share common information; each player may observe a different signal (private monitoring). Thus, players have difficulty in having a common understanding about which market their opponent should be punished in and when punishment should be started and ended. We first theoretically show that an extension of 1-period mutual punishment (1MP) for an arbitrary number of markets can be an equilibrium. Second, by applying a verification method, we identify a simple equilibrium strategy called "locally cautioning (LC)" that restores collusion after observation error or deviation. We then numerically reveal that LC significantly outperforms 1MP and achieves the highest degree of collusion.