Spillover Effects and the Stability of Cartels

It is widely recognized that competition is the most optimal way to ensure economic efficiency and satisfy consumer needs. However, companies are naturally motivated to gain a monopoly position, as this would increase their profits and lower their marketing expenditure. Competition policy, however, is effective in preventing this so long as appropriate regulations are in force when required. If the market is able to ensure competition unaided (e.g. in a perfectly competitive market), government intervention is not only superfluous, but costly and even socially harmful. This paper examines Nash equilibria for the classic Cournot model, as elaborated by Prokop (2011), and extends the results of that paper to cover know-how spillover scenarios. The authors consider sound and novel suggestions concerning cartels in terms of industrial policy on pro-innovation activities. This is because formally stable cartels tend to destabilize in the face of market-related (IP-related) events. The paper introduces, observes and elaborates this phenomenon.