Collusive Equilibrium in the Great Salt Duopoly

Abstract

This paper uses data presented in a report of the Monopolies and Mergers Commission on the market for white salt to test the implications of some recent developments in oligopoly theory. The market in question is a homogeneous, price-setting duopoly where firms are subject to capacity constraints. We find that the conclusions of models based on one-shot non-cooperative games do not hold. Collusion in the market is readily explained by the types of threat strategies underlying Abreu's 'simple penal codes.' Possible explanations of the collusive equilibrium in terms of joint profit maximization are not supported by the data. Indeed the explanation of the equilibrium remains an open question. Copyright 1993 by Royal Economic Society.