On Collusion Sustainability with Stacked Reversion (original) (raw)

Optimal Collusion in Oligopoly Supergames: Marginal Costs Matter

2000

In a standard oligopoly supergame with identical Þrms, a necessary condition on the level of marginal costs is derived for optimal collusion to be sustainable, either in prices or in quantities, for any degree of product differentiation, and any number of Þrms. Only in the Cournot version of the model, and with at most three Þrms, the level of marginal costs plays no role in the sustainability of collusion. Otherwise, for any degree of differentiation and any size of industry, the marginal cost must be higher than a threshold value for an optimal single-period punishment to be obtained. When parameter values are such that no optimal single-period punishment can be implemented, a multi-period punishment can always be constructed that leads Þrms to sustain collusion at the proÞt-maximizing price or quantity level. In that case, punishments last longer when the level of marginal costs decreases. By contrast, the length of the punishment phase does not impact the minimum discount factor for which collusion can be implementable.

Cartel stability and profits under different reactions to entry in markets with growing demand

We study sustainability of collusion with optimal penal codes, in markets where demand growth may trigger the entry of a new firm. In contrast with grim trigger strategies, optimal penal codes make collusion easier to sustain before entry than after. We compare different reactions of the incumbents to entry in terms of: sustainability of collusion, incumbent's profits, entrant's profits, consumer surplus and social welfare. Surprisingly, the incumbent firms may prefer competition to collusion.

Sustaining collusion in markets with a general evolution of demand

2014

This paper proposes a general framework to study the sustainability of collusion in markets where demand growth (although deterministic) is not restricted to occur at a constant rate and may trigger future entry. It is shown that, typically, entry occurs later along the collusive path than along the punishment path (since profits are lower in the latter case). The possibility of delaying entry, therefore, constitutes an additional incentive for deviating just before entry is supposed to occur along the collusive path. In case discontinuing collusion does not delay entry, collusion is shown to be typically more difficult to sustain after than before entry. The proposed model encompasses and explains conflicting results derived in the extant literature under more restrictive settings, and derives some additional results. In particular, it is shown that whether collusion is more difficult before or after entry crucially depends on the magnitude of the entry costs and on the speed at wh...

A note on cartel stability and endogenous sequencing with tacit collusion

Journal of Economics, 2008

We use the concept of cartel stability defined by d'Aspremont et al. (1983) to obtain that the sequence of play between the cartel and the fringe affects cartel stability in a quantity-competition setting where firms tacitly collude. We also prove that an endogenous sequence of play between a cartel and a fringe depends on the discount factor. If the discount factor is large enough, the cartel and the fringe simultaneously choose quantities since the stable cartel may contain more firms under simultaneous play than under cartel leadership. This is due to the fact that under simultaneous play cartel firms have incentives to participate in the cartel because otherwise no collusion is possible.

Duopoly Competition, Escape Dynamics and Non-Cooperative Collusion

SSRN Electronic Journal, 2000

In this paper, we study an imperfect monitoring model of duopoly under similar settings as in Green and Porter (1984), but here firms do not know the demand parameters and learn about them over time though the price signals. We investigate how a deviation from rational expectations affects the decision making process and what kind of behavior is sustainable in equilibrium. We find that the more common information firms analyze to update their beliefs, the more room is for implicit coordination. This might propagate escapes from the Cournot-Nash Equilibrium and the formation of cartels without explicit cooperative motives. In contrast to Green and Porter (1984), our results show that in a model with learning, breakdown of a cartel happens even without a demand shock. Moreover, in this model an expected price serves as an endogenous price threshold, which triggers a price war. Finally, by investigating the durations of the cooperative and price war phases, we find that in industries with a higher Nash equilibrium output and a lower volatility of firm-specific shocks, it is easier to maintain a cartel and harder to break it down.

Asymmetric collusion with growing demand

We characterize collusion sustainability in markets where demand growth may trigger the entry of a new firm whose efficiency may be different from the efficiency of the incumbents. We find that the profit-sharing rule that firms adopt to divide the cartel profit after entry is a key determinant of the incentives for collusion (before and after entry). In particular, if the incumbents and the entrant are very asymmetric, collusion without sidepayments cannot be sustained. However, if firms divide joint profits through bargaining and are sufficiently patient, collusion is sustainable even if firms are very asymmetric. acknowledges the support from Fundação para a Ciência e Tecnologia (BPD/79535/2011).

A note on collusion sustainability with optimal punishments and detection lags

2008

In this note we characterize optimal punishments with detection lags when the market consists of n oligopolistic …rms. We extend a previous note by Colombo and Labrecciosa (2006) [Colombo, L., and Labrecciosa, P., 2006. Optimal punishments with detection lags. Economic Letters 92, 198-201] to show how in the presence of detection lags optimal punishments fail to restore cooperation also in markets with a low number of …rms.

Dynamic Competition with Irreversible Moves: Tacit Collusion (Almost) Guaranteed

We consider a new model to analyze the dynamics of competitive interactions. The players interact repeatedly, but are restricted to employ (weakly) increasingly competitive strategies (e.g. increasing quantities, decreasing prices). In a wide range of circumstances, unique equilibrium paths result, and often those imply tacit collusion (e.g. cartel capacities, monopoly prices). There are several possible motivations of irreversibilities. Physically (besides the literal motivation), the players might constrain their strategy sets themselves (which, paradoxically, can simplify tacit collusion). Technically, the assumption of irreversible moves serves similar ends as that of Markov strategies, and the induced dynamics resemble (re)negotiations.

Sustaining Collusion in Growing Markets

Journal of Economics & Management Strategy, 2008

The impact of demand growth on the maximal degree of collusion (consistent with equilibrium) is investigated in a Cournot supergame where market growth may trigger future entry and a collusive agreement is enforced by the most profitable 'grim trigger strategies' available. It is shown that: (i) delaying entry beyond the first period at which the net present value of the entrant's expected profits is positive may be optimal; and (ii) the interplay between the intrinsic effect of demand growth and the impact of entry crucially determines the overall effect of demand growth on the maximal degree of sustainable pre-entry collusion.

The collusion incentive constraint

The collusion incentive constraint is an important economic measure of cartel stability. It weighs the profits of being in a cartel with those of cheating and punishment of the remaining cartel members. The constraint places no restrictions on firm cartel, cheating and punishment pricing, but is usually considered in a restricted competitive set up characterized by either Cournot or Bertrand competition. This paper examines the constraint under Bertrand competition and homogenous goods when assuming that cartel members have the same market power and then continues to examine if this is not so. JEL: C71, L2, L4