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Endogenous Cartel Formation with Heterogeneous Firms

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  • Iwan Bos
  • Joseph E. Harrington, Jr.

Abstract

In the context of an infinitely repeated capacity-constrained price game, we endogenize the composition of a cartel when .rms are heterogeneous in their capacities. When .rms are sufficiently patient, there exists a stable cartel involving the largest .rms. A .rm 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 e��ects may come from mergers involving moderate-sized firms, rather than the largest or smallest firms.

Suggested Citation

  • Iwan Bos & Joseph E. Harrington, Jr., 2008. "Endogenous Cartel Formation with Heterogeneous Firms," Economics Working Paper Archive 544, The Johns Hopkins University,Department of Economics, revised Nov 2008.
    • Handle: RePEc:jhu:papers:544
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