Journal of Economics

, Volume 107, Issue 3, pp 199–216

On the possibility of welfare-enhancing hard core cartels

Authors

    • Department of Organization and StrategyMaastricht University School of Business and Economics
  • Erik Pot
    • Department of Quantitative EconomicsMaastricht University School of Business and Economics
Open AccessArticle

DOI: 10.1007/s00712-011-0263-3

Cite this article as:
Bos, I. & Pot, E. J Econ (2012) 107: 199. doi:10.1007/s00712-011-0263-3

Abstract

The conventional wisdom is that cartels which merely lead to lower production levels and higher prices are detrimental to social welfare. This paper explores the extent to which this is generally valid. We derive necessary and sufficient conditions for the existence of a hard core cartel that is beneficial for firms and society at large. Considering both strong (with side payments) and weak (without side payments) hard core cartel contracts, we find that (i) both strong and weak welfare-enhancing cartels exist when at least one firm makes a loss on part of its sales in competition, (ii) a welfare-enhancing strong cartel exists whenever there is a difference in unit cost at competitive production levels, and (iii) a welfare-enhancing weak cartel exists when the profit margin on all sales is positive and the cost difference is sufficiently large.

Keywords

Antitrust Cartels Welfare-enhancing collusion

JEL Classification

L1 L4

Copyright information

© The Author(s) 2011