Market-Induced Rationalization and Welfare Enhancing Cartels

D. In `t Veld () and Jan Tuinstra
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D. In `t Veld: University of Amsterdam

No 12-06, CeNDEF Working Papers from Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance

Abstract: We show that incomplete cartels in quantity-setting oligopolies may increase welfare, without any efficiencies or synergies being internalized by cartel formation. The main intuition is that the cartel has an incentive to contract output and that the firms outside the cartel react to this by expanding output. If the outsiders are more efficient than the cartel firms average production costs go down. Even for relatively moderate differences in efficiency total welfare may increase due to this market-induced rationalization.

Date: 2012
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Journal Article: Market-Induced Rationalization and Welfare-Enhancing Cartels (2014)
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