Government-leading welfare-improving collusion (original) (raw)

2020

We study collusion between a public firm and a private firm, focusing on the impact of the public firm’s preference for consumer surplus. We characterize the collusive outcome (market shares, profits, consumer surplus and welfare) that results from Nash bargaining between the two firms, compare it with the competitive outcome, and study sustainability of collusion. If the public firm’s preference for consumer surplus is mild, collusive outcomes are qualitatively similar to those of a private duopoly (both firms reduce output) although distorted by the public firm’s bias towards high output. If the public firm’s preference for consumer surplus is strong, the collusive outcome is qualitatively different. While the public firm reduces output, the private firm expands output to such an extent that total output increases (as long as the public firm’s preference for consumer surplus is not excessive). Output is transferred from the public firm to the private firm so that productive effici...

Policy Implication of Price Collusion in a Duopoly Market with Differentiated Products

ACTA OECONOMICA PRAGENSIA Journal of Central and Eastern European Economic and Management Issues, 2018

This paper uses a duopoly model with horizontally differentiated products to analyse how price collusion in the presence of a uniform tax affects market equilibrium. Moreover, this paper investigates the effect of price collusion on social welfare and the government’s decision in setting the optimal tax. We show that in the presence of a uniform tax, instead of bringing social welfare down as is traditionally believed, price collusion affects government policy implication. We further show that firms still prefer colluding rather than competing, for which the government’s policy decision becomes the key point. By allowing the optimal tax to be negative, we find that under Bertrand competition the government can impose a positive, zero or negative tax on firms depending on the level of the product differentiation. There is a tendency that the more heterogeneous the products, the more subsidies will be given. Under price collusion, the government always subsidises firms regardless of the degree of product differentiation. Finally, we show that when the products are sufficiently differentiated, the government will subsidise firms more under collusion than they will under Bertrand. In short, firms can use price collusion to induce the government to subsidise them. Keywords: Bertrand competition, Collusion, Duopoly Market, Product Differentiation, Tax, Trade Policy, Social Welfare, Subsidy

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.

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.

Cournot duopoly and tacit collusion under fairness and reciprocal preferences

Journal of Economic Theory and Econometrics, 2017

This paper studies the impact of fairness and reciprocity on collusion between firms competing in quantities in infinitely repeated games. A reciprocal firm responds to unkind behavior of rivals with unkind actions (destructive reciprocity), while at the same time, it responds to kind behavior of rivals with kind actions (constructive reciprocity). The paper shows that when firms are reciprocal, collusive quantity profiles are easier to sustain for reasonable perceptions of fair quantities of rivals. However, if only very low quantities deemed as fair, then sustaining collusion could be more difficult when the firms have fairness concerns.

Optimal collusion with limited liability

International Journal of Economic Theory, 2013

Collusion sustainability depends on firms' aptitude to impose sufficiently severe punishments in case of deviation from the collusive rule. We extend results from the literature on optimal collusion by investigating the role of limited liability. We examine all situations in which either structural conditions (demand and technology), financial considerations (a profitability target), or institutional circumstances (a regulation) set a lower bound, possibly negative, to firms' profits. For a large class of repeated games with discounting, we show that, absent participation and limited liability constraints, there exists a unique optimal penal code. It commands a severe single-period punishment immediately after a firm deviates from the collusive stage-game strategy. When either the participation constraint or the limited liability constraint bind, there exists an infinity of multi-period punishment paths that permit firms to implement the optimal collusive strategy. The usual front-loading scheme is only a specific case and an optimal punishment profile can take the form of a price asymmetric cycle. We characterize the situations in which a longer punishment does not perform as a perfect substitute for more immediate severity. In this case the lowest discount factor that permits collusion is strictly higher than without the limited liability constraint, which hinders collusion.

On the tacit collusion equilibria of a dynamic duopoly investment game

Economics Bulletin, 2012

This note further characterizes the tacit collusion equilibria in the investment timing game of Boyer, Lasserre and Moreaux [1]. Tacit collusion equilibria may or may not exist, and when they do may involve either finite time investments (type 1) or infinite delay (type 2). The relationship between equilibria and common demand forms is not immediately apparent. We provide the full necessary and sufficient conditions for existence. A simple condition on demand primitives is derived that determines the type of equilibria. Common demand forms are then shown to illustrate both finite-time and infinite-delay tacit collusion.

Optimal Collusion with Limited Liability and Policy Implications

2011

Welfare-enhancing collusion in the presence of a competitive fringe

2005

Following the structure of many commodity markets, we consider a reduced number of large firms and a competitive fringe of many small suppliers choosing quantities in an infinitehorizon 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 non-collusive 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 collusion is most difficult to sustain can be either at booms or recessions.

Taxation and the sustainability of collusion: ad valorem versus specific taxes

Journal of Economics, 2017

Assuming constant marginal cost, it is shown that a switch from specific to ad valorem taxation that results in the same collusive price has no effect on the critical discount factor required to sustain collusion. This result is shown to hold for Cournot oligopoly when collusion is sustained with Nash-reversion strategies or optimal-punishment strategies. In a Cournot duopoly model with linear demand and quadratic costs, it is shown that the critical discount factor is lower with an ad valorem tax than with a specific tax that results in the same collusive price. However, in contrast to Colombo and Labrecciosa (J Public Econ 97:196-205, 2013) it is shown that the revenue is always higher with an ad valorem tax than with a specific tax.

Government-leading welfare-improving collusion (original) (raw)

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