Endogenous cartel formation with heterogeneous firms

Iwan Bos and Joseph E. Harrington, Jr

RAND Journal of Economics, 2010, vol. 41, issue 1, 92-117

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.

Date: 2010
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https://doi.org/10.1111/j.1756-2171.2009.00091.x

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Working Paper: Endogenous Cartel Formation with Heterogeneous Firms (2008)
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