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Sustaining collusion in markets with a general evolution of demand

Author

Listed:
  • João Correia-da-Silva

    (CEF.UP e Faculdade de Economia do Porto.)

  • Joana Pinho

    (CEF.UP e Faculdade de Economia do Porto.)

  • Hélder Vasconcelos

    (CEPR, CEF.UP e 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.

Suggested Citation

  • João Correia-da-Silva & Joana Pinho & Hélder Vasconcelos, 2014. "Sustaining collusion in markets with a general evolution of demand," FEP Working Papers 537, Universidade do Porto, Faculdade de Economia do Porto.
    • Handle: RePEc:por:fepwps:537
    as

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    File URL: http://www.fep.up.pt/investigacao/workingpapers/wp537.pdf
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    References listed on IDEAS

    as
    1. António Brandão & Joana Pinho & Hélder Vasconcelos, 2014. "Asymmetric Collusion with Growing Demand," Journal of Industry, Competition and Trade, Springer, vol. 14(4), pages 429-472, December.
    2. Motta,Massimo, 2004. "Competition Policy," Cambridge Books, Cambridge University Press, number 9780521016919, September.
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    4. John Haltiwanger & Joseph E. Harrington Jr., 1991. "The Impact of Cyclical Demand Movements on Collusive Behavior," RAND Journal of Economics, The RAND Corporation, vol. 22(1), pages 89-106, Spring.
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    6. Robert W. Staiger & Frank A. Wolak, 1992. "Collusive Pricing with Capacity Constraints in the Presence of Demand Uncertainty," RAND Journal of Economics, The RAND Corporation, vol. 23(2), pages 203-220, Summer.
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    8. Friedman, James W. & Thisse, Jacques-Francis, 1994. "Sustainable collusion in oligopoly with free entry," European Economic Review, Elsevier, vol. 38(2), pages 271-283, February.
    9. Hinloopen,Jeroen (ed.), 2009. "Experiments and Competition Policy," Cambridge Books, Cambridge University Press, number 9780521493420, September.
    10. Hélder Vasconcelos, 2008. "Sustaining Collusion in Growing Markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 17(4), pages 973-1010, December.
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    14. Helder Vasconcelos, 2004. "Entry Effects on Cartel Stability and the Joint Executive Committee," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 24(3), pages 219-241, May.
    15. Knittel, Christopher R. & Lepore, Jason J., 2010. "Tacit collusion in the presence of cyclical demand and endogenous capacity levels," International Journal of Industrial Organization, Elsevier, vol. 28(2), pages 131-144, March.
    16. Correia-da-Silva João & Pinho Joana & Vasconcelos Hélder, 2015. "How Should Cartels React to Entry Triggered by Demand Growth?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 15(1), pages 209-255, January.
    17. Fabra, Natalia, 2006. "Collusion with capacity constraints over the business cycle," International Journal of Industrial Organization, Elsevier, vol. 24(1), pages 69-81, January.
    18. Stenbacka, L Rune, 1990. "Collusion in Dynamic Oligopolies in the Presence of Entry Threats," Journal of Industrial Economics, Wiley Blackwell, vol. 39(2), pages 147-154, December.
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    Cited by:

    1. Correia-da-Silva João & Pinho Joana & Vasconcelos Hélder, 2015. "How Should Cartels React to Entry Triggered by Demand Growth?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 15(1), pages 209-255, January.

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    More about this item

    Keywords

    Collusion; Demand evolution; Entry.;
    All these keywords.

    JEL classification:

    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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