Endogenous Cartel Formation with hetergeneous Firms

A.M. Bos, J. Harrington

Research output: Contribution to journalArticleAcademicpeer-review

Abstract

In the context of an infinitely repeated capacity-constrained price game, we endogenize the composition of a cartel when firms are heterogeneous in their capacities. When firms are sufficiently patient, there exists a stable cartel involving the largest firms. A firm with sufficiently small capacity is not a member of any stable cartel. When a cartel is not all-inclusive, colluding firms set a price that serves as an umbrella with non-cartel members pricing below it and producing at capacity. Contrary to previous work, our results suggest that the most severe coordinated effects may come from mergers involving moderate-sized firms, rather than the largest or smallest firms.
Original languageEnglish
Pages (from-to)92-117
JournalRand Journal of Economics
Volume41
Issue number1
DOIs
Publication statusPublished - 1 Jan 2010

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