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Anticipated Collusion and Excess Capacity

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  • James A. Brander
  • Richard Harris

Abstract

This paper examines an industry where output is determined collusively, with output shares allocated on the basis of relative capacity. Capacity is chosen non-cooperatively, providing an apparently clear incentive for firms to install excess capacity. Although excess capacity equilibria (ECE) may arise, capacity constrained equilibria (CCE) will occur from some parameter values. However, if an ECE occurs, firms will be strictly worse off under this partial cooperation than in the fully non-cooperative setting: partial collusion does more harm than good. The Stackleberg solution coincides with the symmetric Nash equilibrium in the ECE. Entry deterrence is also considered.

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Bibliographic Info

Paper provided by Queen's University, Department of Economics in its series Working Papers with number 530.

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Length: 30
Date of creation: 1983
Date of revision:
Handle: RePEc:qed:wpaper:530

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Cited by:
  1. Davidson, Carl & Deneckere, Raymond J, 1990. "Excess Capacity and Collusion," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(3), pages 521-41, August.
  2. Lars-Hendrik R´┐Żller & Frode Steen, 2006. "On the Workings of a Cartel: Evidence from the Norwegian Cement Industry," American Economic Review, American Economic Association, vol. 96(1), pages 321-338, March.

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