Efficient Collusion with Private Monitoring

This paper considers an in…nitely repeated Cournot duopoly with Imperfect Monitoring. Each firm does not observe the production level of the other firm, but instead observes only a noisy private signal (the price of the product). We show that if the support of the signal is not too large, there is an equilibrium in which both firms produce the cartel level of output. This equilibrium is a result of a slight modi…cation of the grim trigger strategy, showing that the concept of a grim trigger strategy works in a more general context than has previously been envisioned. A Folk Theorem is also established for our game.