A SPATIAL MODEL OF CARTEL STABILITY: THE INFLUENCE OF PRODUCTION COST CONVEXITY

Kai Andree, John Heywood, Mike Schwan and Zheng Wang

Bulletin of Economic Research, 2018, vol. 70, issue 3, 298-311

Abstract: We uniquely introduce convex production costs into a cartel model involving spatial price discrimination. We demonstrate that greater convexity improves cartel stability and that for sufficient convexity first best locations will be adopted. We show that allowing locations to vary over the game reduces cartel stability but that greater convexity continues to improve that stability. Moreover, when the degree of convexity does not support the first best collusive locations, other collusive locations exist that require less stability and these may either increase or decrease social welfare relative to competition. Critically, these locations that require less stability are more dispersed in sharp contrast to the known result assuming linear production costs.

Date: 2018
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