Cartel stability under capacity constraints: The traditional view restored (original) (raw)

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.

Cartel Stability by a Margin

SSRN Electronic Journal

We study cartel stability when firms maintain collusion only if it is more profitable than competition by a sufficiently large margin. Accounting for an (endogenous) cartel margin suggests new unambiguous comparative statics of changes in market characteristics on the scope for stable cartels. The margin increases their effect on the gain from collusion, relative to the gain from deviation. More specifically, we find that when there is a (small) cartel margin, both lower industry marginal cost and less product differentiation can increase cartel stability. The common conjecture that collusion is more prevalent in homogeneous goods and low cost industries-which has no basis in existing cartel theory-is canonically true when firms require even only a small cartel margin. Implications for competition policy include a focus in enforcement on standardized product-low input cost industries. In merger control, efficiencies may increase the risk of coordinated effects.

CARTELS: A GOOD OR A BAD STRATEGY?

Any organization should seek the efficiency maximization, namely the achievement of an effect/effort ratio as high as possible. In order to apply this economic ground rule, some companies use strategies based on gaining a competitive advantage over competitors. In contrast, other companies choose lighter options to increase profitability. They apply strategies focused on agreements with competitors that aim to maintain prices at a certain level regardless of economic factors governing the market mechanism. The purpose of this paper is to highlight the positive and negative effects of cartels as a management strategy. In this regard, the first part of the article summarizes the most important theories about cartels and their characteristics, while the second part presents some European and Romanian cartels, based on data provided by the European Commission and the Competition Council. The final part presents the most important findings and conclusions but also some recommendations for future research.

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).

The profit-sharing rule that maximizes sustainability of cartel agreements

Journal of Dynamics and Games, 2016

We propose a profit-sharing rule that maximizes sustainability of cartel agreements. This rule is such that the critical discount factor is the same for all the firms. If a cartel applies this rule, then asymmetries among firms may not hinder collusion (contrarily to the typical finding in the literature). In the simplest case of a Cournot duopoly in which firms differ in their stocks of capital, we find that the cartel is the least sustainable when one of the firms is approximately two times bigger than the other.

The Effects of Leniency Programs and Fines on Cartel Stability

Metroeconomica, 2007

Using a stylized oligopoly model, we analyze the effect of cartel deterring fines, taking into consideration exemptions granted to cartel members cooperating with the competition authorities. We conclude that the fines can act as a deterrent to breaking collusive agreements, thus stabilizing the cartel. * Constructive comments by Pierre Régibeau, two anonymous referees and Neri Salvadori, the editor, are gratefully acknowledged. In particular, one of the referees should be credited for having brought to our attention the homo economicus point made in the Introduction and in the section on Permanent Cartel Disruption. For all remaining errors, of course, we are to be blamed. Note that Ankur Chavda co-authored this paper while at the Vrije Universiteit Brussel, MICE, and is currently a Product Planner at Microsoft Corporation.

Cartel Pricing Dynamics, Price Wars and Cartel Breakdown

2012

This paper gives an unified explanation of some of the most widely known facts of the cartel literature: prices gradually rise, then remain constant, there can be price wars and some cartels break down. In this model consumers are loss averse and efficiency of a competitive fringe is not publicly observable. In the best collusive equilibrium, the price expectation can be so low that loss aversion makes consumers not buy at the maximal collusive price: firms then set a lower price that rises in time with consumers’ expectations. This increasing price path is bounded from above by the presence of the fringe. If the fringe sets a low price during a sufficient number of periods, there can be price wars and collusion can eventually break down.

Penalizing Cartels: The Case for Basing Penalties on Price Overcharge

SSRN Electronic Journal, 2000

In this paper we set out the welfare economics based case for imposing cartel penalties on the cartel overcharge rather than on the more conventional bases of revenue or profits (illegal gains). To do this we undertake a systematic comparison of a penalty based on the cartel overcharge with three other penalty regimes: fixed penalties; penalties based on revenue, and penalties based on profits. Our analysis is the first to compare these regimes in terms of their impact on both (i) the prices charged by those cartels that do form; and (ii) the number of stable cartels that form (deterrence). We show that the class of penalties based on profits is identical to the class of fixed penalties in all welfare-relevant respects. For the other three types of penalty we show that, for those cartels that do form, penalties based on the overcharge produce lower prices than those based on profit) while penalties based on revenue produce the highest prices. Further, in conjunction with the above result, our analysis of cartel stability (and thus deterrence), shows that penalties based on the overcharge out-perform those based on profits, which in turn out-perform those based on revenue in terms of their impact on each of the following welfare criteria: (a) average overcharge; (b) average consumer surplus; (c) average total welfare.

On optimal cartel deterrence policies

International Journal of Industrial Organization, 2006

This paper studies audit policies designed to deter explicit cartels in the most effective way. We first compare a standard random and stationary audit strategy with a simple deterministic but non stationary strategy; we show that the certainty of an ulterior control may better deter collusion than the recurrent threat of a sword of Damocles that would lead on average to same frequency of audit.

Stability and cohesion of cartels through networks theory

2014

Antitrust Laws consider cartel formation to be one of the most serious infractions. A cartel is an agreement among competitors of the same market, illegal and, therefore, secrete, generally complex and continued in the time, which gets for object to impose to the market similar conditions to those that a monopolist would establish (or at least to those of a dominant operator), with the consequent effects on the quantity and the price equilibrium, and carrying the reduction of the general well-being. Empirical literature, which has studied cartels formation and development, has underlined an approach of causality based on the profitability and the duration of cartels as factors of their success. As regards the determinants of profitability, its importance is related to the level of market concentration, the homogeneity of the product or the similarity in the competitor’s structure costs, besides more or less low rates of growth in the sales or falls of profits they appraise. As for t...