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A Theory of Price-Fixing Rings

Author

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  • E. Kwan Choi
  • Carmen F. Menezes
  • John H. Tressler

Abstract

Price-fixing rings with market sharing arrangements are an empirically important category of cartel phenomena. This paper develops a cartel model in which side payments are not allowed and firms engage in negotiations to fix price and market shares under conditions of demand uncertainty. The negotiated agreement reflects cost averaging and yields a solution on the contract curve. The price determined by unit cost averaging ensures acceptable profits for the firms while the risks associated with slack demand and excess capacity are spread across the firms in accordance with the division of the market. The model's predictions are consistent with available empirical evidence.

Suggested Citation

  • E. Kwan Choi & Carmen F. Menezes & John H. Tressler, 1985. "A Theory of Price-Fixing Rings," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 100(2), pages 465-478.
  • Handle: RePEc:oup:qjecon:v:100:y:1985:i:2:p:465-478.
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    File URL: http://hdl.handle.net/10.2307/1885391
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    Cited by:

    1. van den Berg, Anita & Bos, Iwan, 2017. "Collusion in a price-quantity oligopoly," International Journal of Industrial Organization, Elsevier, vol. 50(C), pages 159-185.

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