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Collusion at the extensive margin

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  • Byford, Martin C.
  • Gans, Joshua S.

Abstract

We augment the multi-market collusion model of Bernheim and Whinston (1990) by allowing for firm entry into, and exit from, individual markets. We show that this gives rise to a new mechanism by which a cartel can sustain a collusive agreement: Collusion at the extensive margin whereby firms collude by avoiding entry into each other's markets or territories. We characterise parameter values that sustain this type of collusion and identify the assumptions where this collusion is more likely to hold than its intensive margin counterpart. Specifically, it is demonstrated that where duopoly competition is fierce collusion at the extensive margin is always sustainable. Finally, we provide a theoretic foundation for the use of a “proportional response” enforcement mechanism.

Suggested Citation

  • Byford, Martin C. & Gans, Joshua S., 2014. "Collusion at the extensive margin," International Journal of Industrial Organization, Elsevier, vol. 37(C), pages 75-83.
  • Handle: RePEc:eee:indorg:v:37:y:2014:i:c:p:75-83
    DOI: 10.1016/j.ijindorg.2014.08.001
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    References listed on IDEAS

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    1. John Gross & William L. Holahan, 2003. "Credible Collusion in Spatially Separated Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(1), pages 299-312, February.
    2. Green, Edward J & Porter, Robert H, 1984. "Noncooperative Collusion under Imperfect Price Information," Econometrica, Econometric Society, vol. 52(1), pages 87-100, January.
    3. Belleflamme, Paul & Bloch, Francis, 2008. "Sustainable collusion on separate markets," Economics Letters, Elsevier, vol. 99(2), pages 384-386, May.
    4. Eric W. Bond & Constantinos Syropoulos, 2008. "Trade costs and multimarket collusion," RAND Journal of Economics, RAND Corporation, vol. 39(4), pages 1080-1104, December.
    5. Jay Pil Choi & Heiko Gerlach, 2012. "International Antitrust Enforcement And Multimarket Contact," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(2), pages 635-658, May.
    6. B. Douglas Bernheim & Michael D. Whinston, 1990. "Multimarket Contact and Collusive Behavior," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 1-26, Spring.
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    Cited by:

    1. Bhattacharjea, Aditya & Sinha, Uday Bhanu, 2015. "Multi-market collusion with territorial allocation," International Journal of Industrial Organization, Elsevier, vol. 41(C), pages 42-50.
    2. Roux, Catherine & Santos-Pinto, Luís & Thöni, Christian, 2016. "Home bias in multimarket Cournot games," European Economic Review, Elsevier, vol. 89(C), pages 361-371.
    3. Jay Pil Choi & Seung-Hyun Hong & Seonghoon Jeon, 2013. "Local Identity and Persistent Leadership in Market Share Dynamics: Evidence from Deregulation in the Korean Soju Industry," Korean Economic Review, Korean Economic Association, vol. 29, pages 267-304.

    More about this item

    Keywords

    Collusion; Credible threats; Proportional response; Multi-market contact;

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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