Collusion in capacity under irreversible investment

Thomas Fagart

International Journal of Industrial Organization, 2022, vol. 81, issue C

Abstract: In the usual theory of collusion, the possibility of collusion increases with the discount factor. The firm’s incentive to deviate is short term: the firm increases its immediate profit but reduces its future profits due to how competitors will react. This paper shows that this result is no longer valid when firms require investment to increase their production and that investment is, at least partially, irreversible. In that case, a firm deviating from a collusive agreement increases its capacity of production, preempting its competitor, and may obtain a dominant position on the market. A higher discount rate makes preemption more profitable, and thus collusion harder to sustain.

Keywords: Capacity investment and disinvestment; Dynamic games; Markov perfect equilibrium; Preemption; Collusion (search for similar items in EconPapers)
JEL-codes: D43 L13 L25 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:indorg:v:81:y:2022:i:c:s0167718721001028

DOI: 10.1016/j.ijindorg.2021.102810

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