Working Paper: NBER ID: w20163
Authors: Martin C. Byford; Joshua S. Gans
Abstract: We augment the multi-market collusion model of Bernheim and Whinston (1990) by allowing for firm entry into, and exit from, individual markets. We show that this gives rise to a new mechanism by which a cartel can sustain a collusive agreement: Collusion at the extensive margin whereby firms collude by avoiding entry into each other's markets or territories. We characterise parameter values that sustain this type of collusion and identify the assumptions where this collusion is more likely to hold than its intensive margin counterpart. Specifically, it is demonstrated that Where duopoly competition is fierce collusion at the extensive margin is always sustainable. The model predicts new forms of market sharing such as oligopolistic competition with a collusive fringe, and predatory entry. We also provide a theoretic foundation for the use of a proportional response enforcement mechanism.
Keywords: No keywords provided
JEL Codes: C73; L41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firm entry strategies (L10) | sustainability of collusion (K21) |
| avoiding entry into each other's markets (F13) | sustainability of collusion (K21) |
| multiple markets (L17) | sustainability of collusion (K21) |
| high duopoly competition (D43) | sustainability of collusion at the extensive margin (D43) |
| strategic decisions regarding market participation (L10) | new forms of market sharing (D26) |