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Anticipated Collusion and Excess Capacity

James Brander and Richard Harris

Working Paper from Economics Department, Queen's University

Abstract: This paper examines an industry where output is determined collusively, with output shares allocated on the basis of relative capacity. Capacity is chosen non-cooperatively, providing an apparently clear incentive for firms to install excess capacity. Although excess capacity equilibria (ECE) may arise, capacity constrained equilibria (CCE) will occur from some parameter values. However, if an ECE occurs, firms will be strictly worse off under this partial cooperation than in the fully non-cooperative setting: partial collusion does more harm than good. The Stackleberg solution coincides with the symmetric Nash equilibrium in the ECE. Entry deterrence is also considered.

Date: 1983
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