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Is capital a collusion device?

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  • Switgard Feuerstein
  • Hans Gersbach

Abstract

We examine how irreversible capital reduces the possibility of a duopoly to sustain implicit collusion by grim strategies, when the product is homogenous and firms compete in quantities. Compared with the case of reversible capital, there are two countervailing effects: Deviation from an existing collusion is less attractive, because capital once installed causes costs forever. But the punishment will also be less severe due to the high capacity the deviating firm can build before punishment starts. The last effect dominates, meaning that the commitment value of capital is negative for all firms. If capital is irreversible, collusion breaks down for realistic magnitudes of interest rates. Copyright Springer-Verlag Berlin Heidelberg 2003

Suggested Citation

  • Switgard Feuerstein & Hans Gersbach, 2003. "Is capital a collusion device?," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 21(1), pages 133-154, January.
    • Handle: RePEc:spr:joecth:v:21:y:2003:i:1:p:133-154
    DOI: 10.1007/s00199-001-0249-4
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    Citations

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    Cited by:

    1. Irina Suleymanova & Franz Hubert, 2007. "Strategic Investment in International Gas-Transport Systems: A Dynamic Analysis of the Hold-up Problem," Energy and Environmental Modeling 2007 24000059, EcoMod.
    2. Switgard Feuerstein, 2005. "Collusion in Industrial Economics—A Survey," Journal of Industry, Competition and Trade, Springer, vol. 5(3), pages 163-198, December.
    3. Fagart, Thomas, 2022. "Collusion in capacity under irreversible investment," International Journal of Industrial Organization, Elsevier, vol. 81(C).
    4. George Symeonidis, 2003. "In Which Industries is Collusion More Likely? Evidence from the UK," Journal of Industrial Economics, Wiley Blackwell, vol. 51(1), pages 45-74, March.

    More about this item

    Keywords

    Keywords and Phrases: Implicit collusion; irreversible capital; value of commitment; Cournot-competition.; JEL Classification Numbers: D43; L13; L41.;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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