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Is capital a collusion device?

Switgard Feuerstein () and Hans Gersbach ()

Economic Theory, 2003, vol. 21, issue 1, 133-154

Abstract: We examine how irreversible capital reduces the possibility of a duopoly to sustain implicit collusion by grim strategies, when the product is homogenous and firms compete in quantities. Compared with the case of reversible capital, there are two countervailing effects: Deviation from an existing collusion is less attractive, because capital once installed causes costs forever. But the punishment will also be less severe due to the high capacity the deviating firm can build before punishment starts. The last effect dominates, meaning that the commitment value of capital is negative for all firms. If capital is irreversible, collusion breaks down for realistic magnitudes of interest rates. Copyright Springer-Verlag Berlin Heidelberg 2003

Keywords: Keywords and Phrases: Implicit collusion; irreversible capital; value of commitment; Cournot-competition.; JEL Classification Numbers: D43; L13; L41. (search for similar items in EconPapers)
Date: 2003
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DOI: 10.1007/s00199-001-0249-4

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