OUTPUT‐EXPANDING COLLUSION IN THE PRESENCE OF A COMPETITIVE FRINGE*

Juan-Pablo Montero and Juan Ignacio Guzman

Journal of Industrial Economics, 2010, vol. 58, issue 1, 106-126

Abstract: Following the structure of many commodity markets, we consider a few large firms and a competitive fringe of many small suppliers choosing quantities in an infinite‐horizon setting subject to demand shocks. We show that a collusive agreement among the large firms may not only bring an output contraction but also an output expansion (relative to the non‐collusive output level). The latter occurs during booms and is due to the strategic substitutability of quantities. We also find that the time at which maximal collusion is most difficult to sustain can be either at booms or recessions. The international copper cartel of 1935–39 is used to illustrate some of our results.

Date: 2010
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