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Abstract

In this paper, we consider anti-dumping (AD) duties as a tool to facilitate collusion between a domestic and a foreign firm in an infinitely repeated differentiated Bertrand game, where prices are publicly observable and each firm receives a privately observed i.i.d. cost shock in each period. We consider second-best scenarios, where market-share or production arrangement with sidepayments is not allowed. We show that there exist equilibrium-path reciprocal ADs. The collusive (trigger) price is distorted downward compared with complete information benchmark as a trade-off between diminishing the incentive to deviate and ensuring off-schedule deviation gains when private cost shocks are highly favourable. The model differs from Green and Porter (1984) and Rotemberg and Saloner (1986) in that it is the private cost shocks as opposed to public demand shocks that necessitate modifications of collusion. In conclusion, AD policy may encourage collusion, and therefore, unless the source of market imperfection is carefully examined, laissez faire might be a better choice.