Cartel stability under capacity constraints: the traditional view restored

Volker Nocke

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: The existence of a negative relationship between cartel stability and the level of excess capacity in an industry has for a long time been the dominant view in the traditional IO literature. Recent supergame-theoretic contributions (e.g. Brock and Scheinkman, 1985) appear to show that this view is ill-founded. Focussing on the issue of enforcement of cartel rules ('incentive contraints'), however, this literature completely ignores firms' 'participation constraints'. Reverting the focus of attention, the present paper restores the traditional view: large cartels will not be sustainable in periods of high excess capacity (low demand). In contrast to the supergame-theoretic literature, it predicts a negative relationship between excess capacity and the collusive price.

Keywords: collusion; excess capacity; business cycle; cartel stability (search for similar items in EconPapers)
JEL-codes: D43 L13 (search for similar items in EconPapers)
Pages: 33 pages
Date: 1999-07
References: Add references at CitEc
Citations: View citations in EconPapers (7)

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Related works:
Working Paper: Cartel Stability under Capacity Constraints: The Traditional View Restored (1999)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:6751

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