Market-Induced Rationalization and Welfare-Enhancing Cartels

Jan Tuinstra and in ’t Veld Daan L. ()
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in ’t Veld Daan L.: Amsterdam School of Economics and CeNDEF, University of Amsterdam and Tinbergen Institute, Valckenierstraat 65–67, 1018 XE Amsterdam, The Netherlands

The B.E. Journal of Economic Analysis & Policy, 2014, vol. 14, issue 1, 189-202

Abstract: We show that incomplete cartels in quantity-setting oligopolies may increase welfare, without any efficiencies or synergies being internalized by cartel formation. The main intuition is that the cartel has an incentive to contract output and that the firms outside the cartel react to this by expanding output. If the outsiders are more efficient than the cartel firms, average production costs go down. We model collusion in a market structure with imperfect substitute goods. Even for relatively moderate differences in efficiency, total welfare may increase due to this market-induced rationalization, whereas the cartel remains profitable. We discuss why the effect can be relevant for sectors where new, superior products are developed. Because anti-cartel enforcement is costly, it is important for competition authorities to realize that not all cartels lead to a welfare loss.

Keywords: efficient cartels; cournot competition; rationalization of production (search for similar items in EconPapers)
JEL-codes: D43 L10 L41 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (2)

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Working Paper: Market-Induced Rationalization and Welfare Enhancing Cartels (2012)
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DOI: 10.1515/bejeap-2013-0005

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