Implicit collusion in non-exclusive contracting under adverse selection

Abstract

This paper studies how implicit collusion may take place through simple non-exclusive contracting under adverse selection when multiple buyers (e.g., entrepreneurs with risky projects) non-exclusively contract with multiple firms (e.g., banks). It shows that any price schedule can be supported as equilibrium terms of trade in the market if each firm's expected profit is no less than its reservation profit. Firms sustain collusive outcomes through the triggering trading mechanism in which they change their terms of trade contingent only on buyers’ reports on the lowest average price that the deviating firm's trading mechanism would induce.