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On the possibility of welfare-enhancing hard core cartels

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  • Iwan Bos
  • Erik Pot

Abstract

The conventional wisdom is that cartels which merely lead to lower production levels and higher prices are detrimental to social welfare. This paper explores the extent to which this is generally valid. We derive necessary and sufficient conditions for the existence of a hard core cartel that is beneficial for firms and society at large. Considering both strong (with side payments) and weak (without side payments) hard core cartel contracts, we find that (i) both strong and weak welfare-enhancing cartels exist when at least one firm makes a loss on part of its sales in competition, (ii) a welfare-enhancing strong cartel exists whenever there is a difference in unit cost at competitive production levels, and (iii) a welfare-enhancing weak cartel exists when the profit margin on all sales is positive and the cost difference is sufficiently large. Copyright The Author(s) 2012

Suggested Citation

  • Iwan Bos & Erik Pot, 2012. "On the possibility of welfare-enhancing hard core cartels," Journal of Economics, Springer, vol. 107(3), pages 199-216, November.
    • Handle: RePEc:kap:jeczfn:v:107:y:2012:i:3:p:199-216
    DOI: 10.1007/s00712-011-0263-3
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    More about this item

    Keywords

    Antitrust; Cartels; Welfare-enhancing collusion; L1; L4;
    All these keywords.

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L4 - Industrial Organization - - Antitrust Issues and Policies

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