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Welfare-Enhancing Collusion in the Presence of a Competitive Fringe

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  • Juan-Pablo Montero

    () (Instituto de Economía. Pontificia Universidad Católica de Chile.)

  • Juan Ignacio Guzmán

Abstract

Following the structure of many commodity markets, we consider a few large firms and a competitive fringe of many small suppliers choosing quantities in an infinite-horizon setting subject to demand shocks. We show that a collusive agreement among the large firms may not only bring an output contraction but also an output expansion (relative to the noncollusive output level). The latter occurs during booms, when the fringe's market share is more important, and is due to the strategic substitutability of quantities (we will never observe an output-expanding collusion in a price-setting game). In addition and depending on the fringe's market share the time at which maximal collusion is most difficult to sustain can be either at booms or recessions.

Suggested Citation

  • Juan-Pablo Montero & Juan Ignacio Guzmán, 2005. "Welfare-Enhancing Collusion in the Presence of a Competitive Fringe," Documentos de Trabajo 298, Instituto de Economia. Pontificia Universidad Católica de Chile..
  • Handle: RePEc:ioe:doctra:298
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