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...

Full description

Saved in:
Bibliographic Details
Published in:MAGKS - Joint Discussion Paper Series in Economics (Band 07-2010)
Main Author: Paha, Johannes
Format: Work
Language:English
Published: Philipps-Universität Marburg 2010
Subjects:
Online Access:PDF Full Text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
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.
Physical Description:42 Pages
ISSN:1867-3678
DOI:10.17192/es2024.0037