Welfare-Improving Mixed Collusion (original) (raw)

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.

Government-leading welfare-improving collusion

International Review of Economics & Finance, 2018

We discuss government-leading welfare-improving collusion in a mixed duopoly. We formulate an infinitely repeated game in which a welfare-maximizing firm and a profitmaximizing firm coexist. The government proposes welfare-improving collusion and this is sustainable if both firms have incentives to follow it. We compare two competition structures-Cournot and Bertrand-in this long-run context. We find that Cournot competition yields greater welfare when the discount factor is sufficiently large, whereas Bertrand competition is better when the discount factor is small.

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

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.

Collusion Helps Abate Environmental Externalities: A Dynamic Approach

IFAC Proceedings Volumes, 2008

We investigate the bearings product market collusion on the abatement of polluting emissions in a Cournot oligopoly where production entails a negative environmental externality. We model the problem as a differential game and investigate the feedback solution of two alternative settings: a fully noncooperative oligopoly and a cartel maximising the discounted profits of all firms in the industry. Our analysis proves that the output reduction entailed by collusive behaviour may have a beneficial effect on steady state welfare, as a result of the balance between a higher market price and a lower amount of polluting emissions. This result opens a new perspective on the debate about the management of environmental externalities, which so far has mainly focussed on the design of Pigouvian taxation.

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).

On the Mode of Competition as a Collusive Perspective in Unionized Oligopoly

2014

In a union-oligopoly framework with differentiated products, this paper endogenizes the mode of product market competition by exploring its strategic role on firms’ incentives for collusion. It is shown that in a one-shot game setup, provided that union members are endowed with risk-neutral and monopoly bargaining power during the negotiations, cartel formation is an unavoidable equilibrium in the product market, hence industry’s outcomes and market participants surpluses/rents equal to that of collusive play. The cartel is proved to be welfare improving, if and only if products’ substitutability is sufficiently high under Cournot competition. Moreover and given firms’ competition, we conclude that among modes of competition, under Bertrand competition Social Welfare is higher than Cournot, while under a Mix of Strategies it lies in-between. Consequently, it is welfare improving to be a benevolent policy maker that deters cartel formation and gives firms’ incentive for Bertrand comp...

Bargaining and Collusion in a Regulatory Model

Recent Advances in the Analysis of Competition Policy and Regulation, 2012

We consider the regulation of a monopolistic market when the principal delegates to a regulatory agency two tasks: the supervision of the …rm's unknown costs and the arrangement of a pricing mechanism. As usual, the agency may have an incentive to hide information from the principal to share the informative rent with the …rm. The novelty of this paper is that both the regulatory mechanism and the side contracting between the agency and the …rm are modelled as a bargaining process. This negotiation between the regulator and the monopoly induces a radical change in the extrapro…t from private information, which is now equal to the standard informational rent weighted by the agency's bargaining power. This in turn a¤ects the collusive stage, in particular the …rm has the greatest incentive to collude when facing an agency with the same bargaining power. Then, we focus on the optimal organizational responses to the possibility of collusion. In our setting, where incompleteness of contracts prevents the design of a screening mechanism between the agency's types and thus Tirole's equivalence principle does not apply, we prove that the stronger the agency in the negotiation process, the greater the incentives for the principal to tolerate collusion in equilibrium.

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.

Collusion in a differentiated duopoly with network externalities

Economics Letters, 2017

h i g h l i g h t s • Conventional wisdom is that collusion between firms will be destabilized when they produce closer substitutes of products. • We show that in the presence of strong network externalities, this result no longer holds. • Collusion becomes more sustainable for closer substitutes of products under relatively strong network externalities.