Sustaining collusion in markets with entry driven by balanced growth
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This paper studies the sustainability of collusion in markets where growth is not restricted to occur at a constant rate and may trigger future entry. Entry typically occurs later along the punishment path than along the collusive path (since profits are lower in the former case), and may not even occur along the punishment path. The possibility of delaying or even deterring entry may, therefore, constitute an additional incentive for deviating just before entry is supposed to occur along the collusive path. If firms set quantities and revert to Cournot equilibrium after a deviation, this incentive more than compensates for the fact that there are more firms after entry, making collusion harder to sustain before entry than after entry. If, instead, firms set prices or use optimal penal codes, deterring entry by breaking the cartel is not profitable, and thus collusion is harder to sustain after entry than before entry. The proposed model encompasses and explains conflicting results derived in the extant literature under more restrictive settings, and derives some novel results.
KeywordsCollusion Entry Market growth
JEL ClassificationL11 L13 K21
This work was financed by FEDER, through the Operational Program for Competitiveness Factors (COMPETE), and by National Funds, through Fundação para a Ciência e a Tecnologia (FCT), through projects PTDC/IIM-ECO/5294/2012 and PEst-OE/EGE/UI4105/2014. João Correia-da-Silva acknowleges support from the European Commission through Marie Skłodowska Curie Fellowship H2020-MSCA-IF-2014-657283. Joana Pinho is grateful to FCT for her post-doctoral scholarship (SFRH/BPD/79535/2011). We thank Giacomo Corneo (Editor) and two anonymous referees for their very useful comments and suggestions. We are also grateful to the seminar participants at U. Évora.
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