Simulation and Prosecution of a Cartel with Endogenous Cartel Formation
AbstractIn many cases, collusive agreements are formed by asymmetric firms and include only a subset of the firms active in the cartelized industry. This paper endogenizes the process of cartel formation in a numeric simulation model where firms differ in marginal costs and production technologies. The paper models the incentive to collude in a differentiated products Bertrand-oligopoly. Cartels are the outcomes of a dynamic formation game in mixed strategies. I find that the Nash-equilibrium of this complex game can be obtained efficiently by a Differential Evolution stochastic optimization algorithm. It turns out that large firms have a higher probability to collude than small firms. Since firms' characteristics evolve over time, the simulation is used to generate data of costs, prices, output-quantities, and profits. This data forms the basis for an evaluation of empirical methods used in the detection of cartels.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) in its series MAGKS Papers on Economics with number 201007.
Length: 37 pages
Date of creation: 2010
Date of revision:
Publication status: Forthcoming in
Collusion; Cartel Detection; Cartel Formation; Differential Evolution; Heuristic Optimization; Industry Simulation;
Find related papers by JEL classification:
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- C69 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Other
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-03-13 (All new papers)
- NEP-CMP-2010-03-13 (Computational Economics)
- NEP-COM-2010-03-13 (Industrial Competition)
- NEP-IND-2010-03-13 (Industrial Organization)
- NEP-REG-2010-03-13 (Regulation)
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.:
- Claude d'Aspremont & Alexis Jacquemin & Jean Jaskold Gabszewicz & John A. Weymark, 1983.
"On the Stability of Collusive Price Leadership,"
Canadian Journal of Economics,
Canadian Economics Association, vol. 16(1), pages 17-25, February.
- Ross, Thomas W., 1992.
"Cartel stability and product differentiation,"
International Journal of Industrial Organization,
Elsevier, vol. 10(1), pages 1-13, March.
- Tom Ross, 1990. "Cartel Stability And Product Differentiation," Carleton Industrial Organization Research Unit (CIORU) 90-04, Carleton University, Department of Economics.
- Edward J Green & Robert H Porter, 1997.
"Noncooperative Collusion Under Imperfect Price Information,"
Levine's Working Paper Archive
1147, David K. Levine.
- Green, Edward J & Porter, Robert H, 1984. "Noncooperative Collusion under Imperfect Price Information," Econometrica, Econometric Society, vol. 52(1), pages 87-100, January.
- Green, Edward J. & Porter, Robert H., 1982. "Noncooperative Collusion Under Imperfect Price Information," Working Papers 367, California Institute of Technology, Division of the Humanities and Social Sciences.
- Hinloopen, Jeroen, 2006. "Internal cartel stability with time-dependent detection probabilities," International Journal of Industrial Organization, Elsevier, vol. 24(6), pages 1213-1229, November.
- Jenny X. Li & Peter Winker, 2003.
"Time Series Simulation with Quasi Monte Carlo Methods,"
Society for Computational Economics, vol. 21(1_2), pages 23-43, 02.
- Jenny Li & Peter Winker, 2003. "Time Series Simulation with Quasi Monte Carlo Methods," Computational Economics, Society for Computational Economics, vol. 21(1), pages 23-43, February.
- Li, J.X. & Winker, P., 2000. "Time Series Simulation With Quasi Monte Carlo Methods," Papers 9-00-1, Pennsylvania State - Department of Economics.
- Peter Winker & Jenny Li, 2000. "Time Series Simulation With Quasi-Monte Carlo Methods," Computing in Economics and Finance 2000 151, Society for Computational Economics.
- Friedman, James W, 1971. "A Non-cooperative Equilibrium for Supergames," Review of Economic Studies, Wiley Blackwell, vol. 38(113), pages 1-12, January.
- Prokop, Jacek, 1999. "Process of dominant-cartel formation," International Journal of Industrial Organization, Elsevier, vol. 17(2), pages 241-257, February.
- Iwan Bos & Joseph E. Harrington, Jr, 2010.
"Endogenous cartel formation with heterogeneous firms,"
RAND Journal of Economics,
RAND Corporation, vol. 41(1), pages 92-117.
- Iwan Bos & Joseph E. Harrington, Jr., 2008. "Endogenous Cartel Formation with Heterogeneous Firms," Economics Working Paper Archive 544, The Johns Hopkins University,Department of Economics, revised Nov 2008.
- Porter, Robert H, 1985. "On the Incidence and Duration of Price Wars," Journal of Industrial Economics, Wiley Blackwell, vol. 33(4), pages 415-26, June.
- Compte, Olivier & Jenny, Frederic & Rey, Patrick, 2002. "Capacity constraints, mergers and collusion," European Economic Review, Elsevier, vol. 46(1), pages 1-29, January.
- Norma Olaizola, 2007. "Cartel formation and managerial incentives," Spanish Economic Review, Springer, vol. 9(3), pages 219-236, September.
- Effrosyni Diamantoudi, 2005. "Stable cartels revisited," Economic Theory, Springer, vol. 26(4), pages 907-921, November.
- Helder Vasconcelos, 2005. "Tacit Collusion, Cost Asymmetries, and Mergers," RAND Journal of Economics, The RAND Corporation, vol. 36(1), pages 39-62, Spring.
- Mattheos Protopapas & Francesco Battaglia & Elias Kosmatopoulo, 2008.
"Coevolutionary Genetic Algorithms for Establishing Nash Equilibrium in Symmetric Cournot Games,"
- Protopapas, M.K. & Kosmatopoulos, E.B. & Battaglia, F., 2009. "Coevolutionary Genetic Algorithms for Establishing Nash Equilibrium in Symmetric Cournot Games," MPRA Paper 15375, University Library of Munich, Germany.
- Donsimoni, Marie-Paule, 1985. "Stable heterogeneous cartels," International Journal of Industrial Organization, Elsevier, vol. 3(4), pages 451-467, December.
- Stephen Davies & Matthew Olczak, 2008. "Tacit versus Overt Collusion Firm Asymmetries and Numbers: What’s the Evidence?," Working Papers 08-32, Centre for Competition Policy, University of East Anglia.
- Johannes Paha, 2010.
"Empirical Methods in the Analysis of Collusion,"
MAGKS Papers on Economics
201033, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
- Rotemberg, Julio J & Saloner, Garth, 1986. "A Supergame-Theoretic Model of Price Wars during Booms," American Economic Review, American Economic Association, vol. 76(3), pages 390-407, June.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bernd Hayo).
If references are entirely missing, you can add them using this form.