How Should Cartels React to Entry Triggered by Demand Growth?

Joao Correia-da-Silva, Joana Pinho and Helder Vasconcelos

The B.E. Journal of Economic Analysis & Policy, 2015, vol. 15, issue 1, 209-255

Abstract: We study the sustainability of collusion with optimal penal codes in markets where demand growth triggers the entry of a new firm. In contrast to grim trigger strategies, optimal penal codes make collusion easier to sustain before entry than after. This conclusion is robust to changes in the number of entrants and to the consideration of price-setting instead of quantity-setting. A comparison is given between different reactions of the incumbents to entry in terms of sustainability of collusion, incumbents’ profits, entrant’s profits, consumer surplus and social welfare. One of our findings is that the incumbent firms may prefer competition to collusion.

Keywords: collusion; demand growth; optimal penal codes; reactions to entry (search for similar items in EconPapers)
JEL-codes: K21 L11 L13 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (2)

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DOI: 10.1515/bejeap-2013-0164

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