Cartel Formation with Endogenous Capacity and Demand Uncertainty

Johannes Paha

VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order from Verein für Socialpolitik / German Economic Association

Abstract: This article provides a framework for the analysis of cartel formation. It models the strategic interaction among firms who invest into production capacity, sell a near-homogeneous good, and are subject to unexpected demand shocks with persistence. The firms either compete or collude in prices. The model shows that a reduction of demand may promote collusion despite lowering collusive profits. This is the case when capacities are durable and a perceptible decline in demand creates excess capacities that make competition more intense. One finds unstable cartels especially for low discount rates as these lead the firms to choose asymmetric capacities.

JEL-codes: D43 L11 L41 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-com and nep-ind
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Citations: View citations in EconPapers (3)

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Working Paper: Cartel Formation With Endogenous Capacity and Demand Uncertainty (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc13:79726

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