Sustaining collusion in markets with a general evolution of demand

Joao Correia-da-Silva, Joana Pinho and Helder Vasconcelos

FEP Working Papers from Universidade do Porto, Faculdade de Economia do Porto

Abstract: This paper proposes a general framework to study the sustainability of collusion in markets where demand growth (although deterministic) is not restricted to occur at a constant rate and may trigger future entry. It is shown that, typically, entry occurs later along the collusive path than along the punishment path (since profits are lower in the latter case). The possibility of delaying entry, therefore, constitutes an additional incentive for deviating just before entry is supposed to occur along the collusive path. In case discontinuing collusion does not delay entry, collusion is shown to be typically more difficult to sustain after than before entry. The proposed model encompasses and explains conflicting results derived in the extant literature under more restrictive settings, and derives some additional results. In particular, it is shown that whether collusion is more difficult before or after entry crucially depends on the magnitude of the entry costs and on the speed at which demand converges to its long-term evolution.

Keywords: Collusion; Demand evolution; Entry. (search for similar items in EconPapers)
JEL-codes: K21 L11 L13 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2014-05
New Economics Papers: this item is included in nep-com and nep-ind
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:por:fepwps:537

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