THE VALUE OF COLLUSION WITH ENDOGENOUS CAPACITY AND DEMAND UNCERTAINTY

Collusion has often been alleged in industries where long-lived capacity investments are important. This article develops a computational duopoly model with capacity investments, demand shocks and either competitive or collusive pricing. It shows that allowing for endogenous capacity investments can...

Full description

Saved in:
Bibliographic Details
Published inThe Journal of industrial economics Vol. 65; no. 3; pp. 623 - 653
Main Author Paha, Johannes
Format Journal Article
LanguageEnglish
Published Oxford John Wiley & Sons Ltd 01.09.2017
Blackwell Publishing Ltd
Subjects
Collusion
Competition
Duopoly
Economic models
Endogenous
Industrial economics
Investments
Production capacity
Profitability
Uncertainty
Online AccessGet full text

Cover

More Information
Summary:Collusion has often been alleged in industries where long-lived capacity investments are important. This article develops a computational duopoly model with capacity investments, demand shocks and either competitive or collusive pricing. It shows that allowing for endogenous capacity investments can sometimes make collusion less valuable than competition and that it can change the normal relationships between the profitability of collusion and both the discount rate and industry-wide demand shocks.
Bibliography:I would like to thank Joe Harrington for his contributions to this article. I would also like to thank Max Albert, John Asker, Jiawei Chen, Allan Collard‐Wexler, Ulrich Doraszelski, Natalia Fabra, Georg Götz, Daniel Herold, Jürgen Meckl, Maarten‐Pieter Schinkel, the Editor, and three anonymous referees for their comments and support. Further valuable comments were provided by the participants of seminars at Johannes‐Kepler‐University Linz (April 2016), Wirtschaftsuniversität Vienna (January 2014) and the participants of the following conferences: MaCCI 2012 (Mannheim), Earie 2012 (Rome), Eale 2012 (Stockholm), Verein für Socialpolitik 2013 (Düsseldorf).
I am grateful for the hospitality of the Department of Economics of Johns Hopkins University, where part of this research was conducted. This work was supported by a fellowship within the Postdoc‐Programme of the German Academic Exchange Service (DAAD). The assistance provided by these institutions is gratefully acknowledged.
ISSN:0022-1821
1467-6451
DOI:10.1111/joie.12143