Collusion in a differentiated duopoly with network externalities (original) (raw)

Costly Collusion in Differentiated Industries

Marketing Science, 2007

T his paper demonstrates that increased product differentiation will make it more difficult to sustain collusion when it is costly to coordinate or maintain collusion. This result holds for a wide range of models, including all those commonly used to model competition between differentiated products. This contrasts with the previous theoretical literature, which shows that, in the absence of these costs, greater differentiation can help foster collusion under some common models of product differentiation but is consistent with the empirical literature, which suggests that collusion tends to occur most among homogeneous firms.

A dynamic oligopoly with collusion and price wars

1999

We provide a collusive framework with heterogeneity among jirms, investment, entry, and exit. It is a symmetric-information model in which it is hard to sustain collusion when there is an activeJim that is likely to exit in the near future. Numerical analysis is used to compare a collusive to a noncollusive environment. Only the collusive industry generates price wars. Also, the collusive industry offers both more and higherquality products to consumers, albeit often at a higher price. The positive effect of collusion on variety and quality more than compensates consumers for the negative effect of collusive prices, so that consumer surplus is larger with collusion.

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.

Tacit collusion and market concentration under network effects

Economics Letters, 2016

In an infinitely repeated Cournot game with trigger strategy punishment, we demonstrate that the relationship between market concentration and collusion sustainability depends on the strength of network externalities. The latter is shown to interact with the number of firms and to affect the profitability of cooperation vs. competition, which delivers the result, challenging conventional wisdom, that lower market concentration can make collusion more stable.

Multi-Market Collusion with Demand Linkages and Antitrust Enforcement

The Journal of Industrial Economics, 2013

This paper analyzes dynamic cartel formation and antitrust enforcement when firms operate in demand-related markets. We show that cartel prosecution can have a knock-on effect: desisting a cartel in one market reduces profits and cartel stability and leads to the break-up of the cartel in the adjacent market. Cartel prosecution can also have a waterbed effect: desisting a cartel increases cartel stability in the adjacent market and induces cartel formation in previously competitive markets. We also consider policy implications of our analysis regarding an antitrust authority's investment decision in cartel enforcement.

Collusion-Enhancing Institutions in Dispersed Oligopolies

Collusion in oligopoly is a fit subject for analysing how institutions help coordinate Pareto-improving social behavior. This notwithstanding, eco- nomic analysis has devoted little attention to the institutional underpin- nings of collusion behavior. Deliberate institutional design is particularly needed when the number of firms is large since, under such conditions, factors that facilitate collusion must be manipulated through artificial arrangements, to overcoming the "critical discount rate" becoming smaller as the number of firms increases. In this paper we claim that a typi- cal institutional arrangement to sustain collusion in dispersed industries calls for an artificial control of the firms' marginal cost function. First, we provide a novel result to show that, in a dynamic Cournot model, un- der decreasing returns, collusion can always be sustained in equilibrium for any given discount factor provided the marginal cost function is suffi- ciently steep. Moreov...

Collusion when the Number of Firms is Large

Quaderni dell'Istituto di Economia e Finanza, 2006

In antitrust analysis it is generally agreed that a small number of firms operating in the industry is an essential precondition for collusive behavior to be sustainable. However, the Italian Competition Authority (AGCM) challenged this view in the recent case RCA (2000), when an information exchange among forty-four firms in the car insurance market was assessed as having an anticompetitive object. The AGCM's basic argument was that an information exchange facilitates collusion because it changes the market environment in such a way as to relax the incentive compatibility constraint for collusion, thus circumventing the decrease in the critical discount factor when the number of firms in the industry increases. In this paper we model collusive behavior in a "dispersed" oligopoly. We prove that, when the technology exhibits decreasing returns to scale, collusion can always be sustained, regardless of the number of firms, provided the marginal cost function is sufficiently steep. Moreover, we show how an information exchange can sustain collusive behavior when the number of firms is "large" independently of the assumptions on technology.

Collusion and Antitrust Detection

The Japanese Economic Review, 1995

This paper investigates the impact of antitrust policy on the strategic choice of product specification when firms can collude with respect to prices, cannot collude with respect to location and may have their collusion ended if it is detected by the antitrust authority. Depending on the aggressiveness of the antitrust authority, different location configurations may emerge in equilibrium. Extremely aggressive and extremely lax policies lead to the least efficient outcomes while the configuration maximizing social welfare is obtained by an intermediate policy.

Collusion in mixed oligopolies and the coordinated effects of privatization

Journal of Economics, 2017

We study the sustainability of collusion in mixed oligopolies where private and public firms only differ in their objective: private firms maximize profits, while public firms maximize total surplus. If marginal costs are increasing, public firms do not supply the entire market, leaving room for private firms to produce and possibly cooperate by restricting output. The presence of public firms makes collusion among private firms harder to sustain, and maybe even unprofitable. As the number of private firms increases, collusion may become easier or harder to sustain. Privatization makes collusion easier to sustain, and is socially detrimental whenever firms are able to collude after privatization (which is always the case if they are sufficiently patient). Coordinated effects thus reverse the traditional result according to which privatization is socially desirable if there are many firms in the industry.