Cartel Stability Under Capacity Constraints: The Traditional View Restored

35 Pages Posted: 11 Jul 2008

Multiple version iconThere are 2 versions of this paper

Date Written: July 1999

Abstract

The existence of a negative relationship between cartel stability and the level of excess capacity in an industry has for a long time been the dominant view in the traditional IO literature. Recent supergame-theoretic contributions (e.g. Brock and Scheinkman, 1985) appear to show that this view is ill-founded. Focussing on the issue of enforcement of cartel rules ('incentive contraints'), however, this literature completely ignores firms' 'participation constraints'. Reverting the focus of attention, the present paper restores the traditional view: large cartels will not be sustainable in periods of high excess capacity (low demand). In contrast to the supergame-theoretic literature, it predicts a negative relationship between excess capacity and the collusive price.

Suggested Citation

Nocke, Volker, Cartel Stability Under Capacity Constraints: The Traditional View Restored (July 1999). LSE STICERD Research Paper No. EI23, Available at SSRN: https://ssrn.com/abstract=1158300

Volker Nocke (Contact Author)

University of Mannheim ( email )

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