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How Should Cartels React to Entry Triggered by Demand Growth?

Author

Listed:
  • Correia-da-Silva João
  • Pinho Joana

    (CEF.UP and Faculdade de Economia, Universidade do Porto, Porto, Portugal)

  • Vasconcelos Hélder

    (CEPR. CEF.UP and Faculdade de Economia, Universidade do Porto, Porto, Portugal)

Abstract

We study the sustainability of collusion with optimal penal codes in markets where demand growth triggers the entry of a new firm. In contrast to grim trigger strategies, optimal penal codes make collusion easier to sustain before entry than after. This conclusion is robust to changes in the number of entrants and to the consideration of price-setting instead of quantity-setting. A comparison is given between different reactions of the incumbents to entry in terms of sustainability of collusion, incumbents’ profits, entrant’s profits, consumer surplus and social welfare. One of our findings is that the incumbent firms may prefer competition to collusion.

Suggested Citation

  • Correia-da-Silva João & Pinho Joana & Vasconcelos Hélder, 2015. "How Should Cartels React to Entry Triggered by Demand Growth?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 15(1), pages 1-47, January.
    • Handle: RePEc:bpj:bejeap:v:15:y:2015:i:1:p:47:n:7
    DOI: 10.1515/bejeap-2013-0164
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    References listed on IDEAS

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    1. João Correia-da-Silva & Joana Pinho & Hélder Vasconcelos, 2014. "Sustaining collusion in markets with a general evolution of demand," FEP Working Papers 537, Universidade do Porto, Faculdade de Economia do Porto.
    2. João Correia-da-Silva & Joana Pinho & Hélder Vasconcelos, 2016. "Sustaining collusion in markets with entry driven by balanced growth," Journal of Economics, Springer, vol. 118(1), pages 1-34, May.

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