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Simulation and Prosecution of a Cartel with Endogenous Cartel Formation

Johannes Paha ()

No 201007, MAGKS Papers on Economics from Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung)

Abstract: In many cases, collusive agreements are formed by asymmetric firms and include only a subset of the firms active in the cartelized industry. This paper endogenizes the process of cartel formation in a numeric simulation model where firms differ in marginal costs and production technologies. The paper models the incentive to collude in a differentiated products Bertrand-oligopoly. Cartels are the outcomes of a dynamic formation game in mixed strategies. I find that the Nash-equilibrium of this complex game can be obtained efficiently by a Differential Evolution stochastic optimization algorithm. It turns out that large firms have a higher probability to collude than small firms. Since firms' characteristics evolve over time, the simulation is used to generate data of costs, prices, output-quantities, and profits. This data forms the basis for an evaluation of empirical methods used in the detection of cartels.

Keywords: Collusion; Cartel Detection; Cartel Formation; Differential Evolution; Heuristic Optimization; Industry Simulation (search for similar items in EconPapers)
JEL-codes: C51 C69 C72 D43 L12 L13 L40 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2010
New Economics Papers: this item is included in nep-cmp, nep-com, nep-ind and nep-reg
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