Capital Investments and Price Agreements in Semicollusive Markets

Chaim Fershtman () and Eitan Muller

RAND Journal of Economics, 1986, vol. 17, issue 2, 214-226

Abstract: We consider a semicollusive market where firms compete in a long-run variable, such as investment in capital or capacity, and collude with respect to a short-run variable, such as price or market shares. Our concern is with the potential destabilizing effect of the long-run competition on the short-run collusion. We show that under a certain refinement of the equilibrium, the set of equilibria is reduced to include just the one in which the collusive agreement is stable. We then lend some support to the phenomenon of an inverse association between advertising and competition by investigating the conditions under which overcapitalization occurs in the above equilibrium.

Date: 1986
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