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.
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Acknowledgments
We are indebted to Marco Haan, Joe Harrington, Ronald Peeters, Hans Peters, Dries Vermeulen, participants at the 2010 International Industrial Organization Conference in Vancouver, participants at the 2010 European Association for Research in Industrial Economics Conference in Istanbul and two anonymous referees for helpful comments and suggestions.
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An earlier version of this work was titled ‘Welfare-Enhancing Hard Core Cartels’.
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Open Access This is an open access article distributed under the terms of the Creative Commons Attribution Noncommercial License (https://creativecommons.org/licenses/by-nc/2.0), which permits any noncommercial use, distribution, and reproduction in any medium, provided the original author(s) and source are credited.
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Bos, I., Pot, E. On the possibility of welfare-enhancing hard core cartels. J Econ 107, 199–216 (2012). https://doi.org/10.1007/s00712-011-0263-3
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DOI: https://doi.org/10.1007/s00712-011-0263-3