How Demand Information Can Destabilize a Cartel

This paper studies a symmetric Bertrand duopoly with imperfect monitoring where firms receive noisy public signals about the state of demand. These signals have two opposite effects on the incentive to collude: avoiding punishment after a low-demand period increases collusive profits, making collusion more attractive, but it also softens the threat of punishment, which increases the temptation to undercut the rival. There are cases where the latter effect dominates, and so the collusive quilibrium does not always exist when it does absent demand information. These findings are related to the Sugar Institute Case studied by Genesove and Mullin (2001).