Working Papers, The Johns Hopkins University, Department of Economics 588
A theory of tacit collusion is developed based on coordination through price leadership and less than full mutual understanding of strategies. It is common knowledge that price increases are to be at least matched but who should lead and at what price is not common knowledge. The steady-state price is characterized and it falls short of the best collusive equilibrium price. Coordination through tacit means, rather than express communication, is then shown to constrain the extent of the price rise from collusion.