The existence of a negative relationship between cartel stability and the level of excess capacity in an industry has for a long time been the dominant view in the traditional IO literature. Recent supergame-theoretic contributions (e.g. Brock and Scheinkman, 1985) appear to show that this view is ill-founded. Focussing on the issue of enforcement of cartel rules ('incentive contraints'), however, this literature completely ignores firms' 'participation constraints'. Reverting the focus of attention, the present paper restores the traditional view: large cartels will not be sustainable in periods of high excess capacity (low demand). In contrast to the supergame-theoretic literature, it predicts a negative relationship between excess capacity and the collusive price.
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Paper provided by Suntory and Toyota International Centres for Economics and Related Disciplines, LSE in its series STICERD - Economics of Industry Papers with number
23.
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)
Ludovic Renou, 2006.
"Partnerships,"
Working Papers
2006-05, University of Adelaide, School of Economics.
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