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Endogenous Cartel Formation with Heterogeneous Firms and Differentiated Products
Real-world collusive agreements do not necessarily include all firms that are active in the cartelized industry. Often, cartels are formed by asymmetric firms offering products that are not completely homogenous. This article endogenizes the process of cartel formation in a simulation model where fi...
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| Published in: | MAGKS - Joint Discussion Paper Series in Economics (Band 07-2010) |
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| Main Author: | |
| Format: | Work |
| Language: | English |
| Published: |
Philipps-Universität Marburg
2010
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| Subjects: | |
| Online Access: | PDF Full Text |
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| Summary: | Real-world collusive agreements do not necessarily include all firms that are active in the cartelized industry. Often, cartels are formed by asymmetric firms offering products that are not completely homogenous. This article endogenizes the process of cartel formation in a simulation model where firms are asymmetric in marginal costs and offer differentiated products. After a cartel is formed, it may be destabilized if the evolution of costs produces a sufficiently asymmetric cost-structure. In this case, the cartelists use price wars to stabilize the collusive agreement. Cartels arise as the outcome of a dynamic formation game in mixed strategies. This game is complex because of firms' asymmetry and the multitude of possible cartel-compositions. I show that the Nash-equilibrium of this game can be obtained efficiently by a Differential Evolution stochastic optimization algorithm. It turns out that large firms gain more from colluding than small firms. Nevertheless, large firms choose a lower probability of joining the cartel. |
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| Physical Description: | 42 Pages |
| ISSN: | 1867-3678 |
| DOI: | 10.17192/es2024.0037 |