How should cartels react to entry triggered by demand growth?

João Correia-da-Silva; Joana Pinho; Hélder Vasconcelos

doi:10.1515/bejeap-2013-0164

How should cartels react to entry triggered by demand growth?

João Correia-da-Silva, Joana Pinho^*, Hélder Vasconcelos

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

1 Citation (Scopus)

Abstract

We study the sustainability of collusion with optimal penal codes in markets where demand growth triggers the entry of a new firm. In contrast to grim trigger strategies, optimal penal codes make collusion easier to sustain before entry than after. This conclusion is robust to changes in the number of entrants and to the consideration of price-setting instead of quantity-setting. A comparison is given between different reactions of the incumbents to entry in terms of sustainability of collusion, incumbents' profits, entrant's profits, consumer surplus and social welfare. One of our findings is that the incumbent firms may prefer competition to collusion.

Original language	English
Pages (from-to)	209-255
Number of pages	47
Journal	B.E. Journal of Economic Analysis and Policy
Volume	15
Issue number	1
DOIs	https://doi.org/10.1515/bejeap-2013-0164
Publication status	Published - 1 Jan 2015
Externally published	Yes

Keywords

Collusion
Demand growth
Optimal penal codes
Reactions to entry

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10.1515/bejeap-2013-0164

Cite this

@article{c87f1effefcd43e382239adb0daa040d,

title = "How should cartels react to entry triggered by demand growth?",

abstract = "We study the sustainability of collusion with optimal penal codes in markets where demand growth triggers the entry of a new firm. In contrast to grim trigger strategies, optimal penal codes make collusion easier to sustain before entry than after. This conclusion is robust to changes in the number of entrants and to the consideration of price-setting instead of quantity-setting. A comparison is given between different reactions of the incumbents to entry in terms of sustainability of collusion, incumbents' profits, entrant's profits, consumer surplus and social welfare. One of our findings is that the incumbent firms may prefer competition to collusion.",

keywords = "Collusion, Demand growth, Optimal penal codes, Reactions to entry",

author = "Jo{\~a}o Correia-da-Silva and Joana Pinho and H{\'e}lder Vasconcelos",

note = "Funding Information: The last inequality is satisfied for N ≥ 2, which is the admissible range for N. Therefore, we conclude that the ICC for collusion to be sustainable after all firms have entered is the one that is binding. □ Acknowledgments: This work was financed by FEDER, through the Operational Program for Competitiveness Factors (COMPETE), and by National Funds, through Funda{\c c}{\~a}o para a Ci{\^e}ncia e a Tecnologia (FCT), through projects PTDC/IIM-ECO/5294/2012 and PEst-OE/EGE/UI4105/2014. Joana Pinho is also grateful to FCT for her post-doctoral scholarship (SFRH/BPD/79535/2011). We are grateful to Emilie Dargaud and two anonymous referees for their helpful comments and suggestions. We also thank participants in seminars at U. Porto, the 13th SAET Conference on Current Trends in Economics and the 40th EARIE Annual Conference in Rome. Publisher Copyright: {\textcopyright} 2015 by De Gruyter. Copyright: Copyright 2014 Elsevier B.V., All rights reserved.",

year = "2015",

month = jan,

day = "1",

doi = "10.1515/bejeap-2013-0164",

language = "English",

volume = "15",

pages = "209--255",

journal = "B.E. Journal of Economic Analysis and Policy",

issn = "1538-0653",