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Cartel Formation with Endogenous Capacity and Demand Uncertainty

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  • Paha, Johannes

Abstract

This article provides a framework for the analysis of cartel formation. It models the strategic interaction among firms who invest into production capacity, sell a near-homogeneous good, and are subject to unexpected demand shocks with persistence. The firms either compete or collude in prices. The model shows that a reduction of demand may promote collusion despite lowering collusive profits. This is the case when capacities are durable and a perceptible decline in demand creates excess capacities that make competition more intense. One finds unstable cartels especially for low discount rates as these lead the firms to choose asymmetric capacities.

Suggested Citation

  • Paha, Johannes, 2013. "Cartel Formation with Endogenous Capacity and Demand Uncertainty," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79726, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc13:79726
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    Cited by:

    1. Johannes Paha, 2013. "The Impact of Persistent Shocks and Concave Objective Functions on Collusive Behavior," MAGKS Papers on Economics 201328, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    2. Swoboda, Sandra Maria, 2017. "Einfluss ausgewählter Determinanten auf die Kartellbildung und -stabilität: Eine Literaturstudie," Arbeitspapiere 176, University of Münster, Institute for Cooperatives.
    3. Herold, Daniel, 2015. "A Principal-Agent Model of Competition Law Compliance," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112980, Verein für Socialpolitik / German Economic Association.

    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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