Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/93498
Authors: 
Paha, Johannes
Year of Publication: 
2013
Series/Report no.: 
Joint Discussion Paper Series in Economics 43-2013
Abstract: 
This article analyzes the strategic decisions of firms whether to establish and adhere to a cartel when they can also shape competition by investing into production capacity while being subject to unexpected demand shocks with persistence. The model shows that a negative demand shock can facilitate cartel formation despite lowering collusive profits. This is because lower demand reduces capacity utilization and makes competition more intense especially when capacities are durable and when demand falls much within a short time. The model also shows that firms with a low discount rate strive for a dominant position in the market which results in asymmetric capacity distributions. These obstruct collusive strategies. This is interesting because a low discount rate is usually considered a facilitating factor for collusion.
Subjects: 
Asymmetric firms
capacity investments
cartel formation
demand shocks
excess capacity
JEL: 
D21
D43
L11
L13
L41
Document Type: 
Working Paper

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