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Endogenous cartel formation with heterogeneous firms

  • Iwan Bos
  • Joseph E. Harrington, Jr
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In the context of an infinitely repeated capacity-constrained price game, we endogenize the composition of a cartel when firms are heterogeneous in their capacities. When firms are sufficiently patient, there exists a stable cartel involving the largest firms. A firm with sufficiently small capacity is not a member of any stable cartel. When a cartel is not all-inclusive, colluding firms set a price that serves as an umbrella with non-cartel members pricing below it and producing at capacity. Contrary to previous work, our results suggest that the most severe coordinated effects may come from mergers involving moderate-sized firms, rather than the largest or smallest firms. Copyright (c) 2010, RAND.

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Article provided by RAND Corporation in its journal The RAND Journal of Economics.

Volume (Year): 41 (2010)
Issue (Month): 1 ()
Pages: 92-117

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Handle: RePEc:bla:randje:v:41:y:2010:i:1:p:92-117
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  1. Escrihuela-Villar, Marc, 2008. "Partial coordination and mergers among quantity-setting firms," International Journal of Industrial Organization, Elsevier, vol. 26(3), pages 803-810, May.
  2. 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.
  3. Marc Escrihuela Villar, 2008. "A note on cartel stability and endogenous sequencing with tacit collusion," DEA Working Papers 29, Universitat de les Illes Balears, Departament d'Economía Aplicada.
  4. Reinhard Selten, 1973. "A Simple Model of Imperfect Competition, where 4 are Few and 6 are Many," Center for Mathematical Economics Working Papers 008, Center for Mathematical Economics, Bielefeld University.
  5. Compte, Olivier & Jenny, Frederic & Rey, Patrick, 2002. "Capacity constraints, mergers and collusion," European Economic Review, Elsevier, vol. 46(1), pages 1-29, January.
  6. Lars-Hendrik R�ller & 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.
  7. Donsimoni, Marie-Paule, 1985. "Stable heterogeneous cartels," International Journal of Industrial Organization, Elsevier, vol. 3(4), pages 451-467, December.
  8. Marc Escrihuela-Villar, 2008. "On endogenous cartel size under tacit collusion," Investigaciones Economicas, Fundación SEPI, vol. 32(3), pages 325-338, September.
  9. Hay, George A & Kelley, Daniel, 1974. "An Empirical Survey of Price Fixing Conspiracies," Journal of Law and Economics, University of Chicago Press, vol. 17(1), pages 13-38, April.
  10. Harrington, Joseph E., 2006. "How Do Cartels Operate?," Foundations and Trends(R) in Microeconomics, now publishers, vol. 2(1), pages 1-105, August.
  11. 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.
  12. Joseph E. Harrington, Jr, 2006. "How Do Cartels Operate?," Economics Working Paper Archive 531, The Johns Hopkins University,Department of Economics.
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