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Countervailing Power? Collusion in Markets with Decentralized Trade

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Author Info
Nadia Burani
Clara Ponsati ()

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Abstract

We consider the collective incentives of buyers and sellers to form cartels in markets where trade is realized through decentralized pairwise bargaining. Cartels are coalitions of buyers or sellers that limit market participation and compensate inactive members for abstaining from trade. In a stable market outcome, cartels set Nash equilibrium quantities and cartel memberships are immune to defections. We prove that the set of stable market outcomes is non-empty and we provide its full characterization. Stable market outcomes are of two types: (i) at least one cartel actively restrains trade and the levels of market participation are balanced, or (ii) only one cartel, eventually the cartel that forms on the long side of the market, is active and it reduces trade slightly below the opponent's.

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Publisher Info
Paper provided by Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) in its series UFAE and IAE Working Papers with number 540.02.

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Length: 23
Date of creation: 30 Sep 2002
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Handle: RePEc:aub:autbar:540.02

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Related research
Keywords: Decentralized Trade; pairwise bargaining; bilateral cartel fornation; cartel stability; countervailing power;

Find related papers by JEL classification:
C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

References listed on IDEAS
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  1. Claude, et al d'Aspremont, 1983. "On the Stability of Collusive Price Leadership," Canadian Journal of Economics, Canadian Economics Association, vol. 16(1), pages 17-25, February. [Downloadable!] (restricted)
  2. Rubinstein, Ariel & Wolinsky, Asher, 1985. "Equilibrium in a Market with Sequential Bargaining," Econometrica, Econometric Society, vol. 53(5), pages 1133-50, September. [Downloadable!] (restricted)
  3. Donsimoni, Marie-Paule & Economides, Nicholas S & Polemarchakis, Herakles M, 1986. "Stable Cartels," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(2), pages 317-27, June. [Downloadable!] (restricted)
  4. McAfee, R Preston & McMillan, John, 1992. "Bidding Rings," American Economic Review, American Economic Association, vol. 82(3), pages 579-99, June. [Downloadable!] (restricted)
    Other versions:
    • McAfee, R. Preston & McMillan, John., 1990. "Bidding Rings," Working Papers 726, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
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