Cartel Formation With Endogenous Capacity and Demand Uncertainty

Johannes Paha

MAGKS Papers on Economics from Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung)

Abstract: This article analyzes the strategic decisions of firms whether to establish and adhere to a cartel when they can also shape competition by investing into production capacity while being subject to unexpected demand shocks with persistence. The model shows that a negative demand shock can facilitate cartel formation despite lowering collusive profits. This is because lower demand reduces capacity utilization and makes competition more intense especially when capacities are durable and when demand falls much within a short time. The model also shows that firms with a low discount rate strive for a dominant position in the market which results in asymmetric capacity distributions. These obstruct collusive strategies. This is interesting because a low discount rate is usually considered a facilitating factor for collusion.

Keywords: Asymmetric firms; capacity investments; cartel formation; demand shocks; excess capacity (search for similar items in EconPapers)
JEL-codes: D21 D43 L11 L13 L41 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2013
New Economics Papers: this item is included in nep-bec, nep-com and nep-ind
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Forthcoming in

Downloads: (external link)
https://www.uni-marburg.de/en/fb02/research-groups ... ers/43-2013_paha.pdf First 201343 (application/pdf)

Related works:
Working Paper: Cartel Formation with Endogenous Capacity and Demand Uncertainty (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:mar:magkse:201343

Access Statistics for this paper

More papers in MAGKS Papers on Economics from Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) Contact information at EDIRC.
Bibliographic data for series maintained by Bernd Hayo ().