Cartels, Profits and Excess Capacity

Martin Osborne and Carolyn Pitchik

International Economic Review, 1987, vol. 28, issue 2, 413-28

Abstract: A model of a collusive duopoly in which each firm has limited capacity is studied. The negotiated output quotas depend on the bargaining power of the firms, which derives from the damage the firms can do by cutting prices. For fixed capacities, the unit profit of the small firm is at least as large as that of the large firm, and the relative position of the small firm is better when demand is low. When the capacities can be chosen once-and-for-all, there is excess capacity in equilibrium so long as the cost of capacity is not too high. Copyright 1987 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 1987
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