Collusion at the Extensive Margin
31 Pages Posted: 28 Sep 2010 Last revised: 24 Apr 2014
Date Written: April 22, 2014
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 counter-part. 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: Collusion, Credible Threats, Proportional Response, Segmented Markets, Multi-Market Contact, Predatory Entry
JEL Classification: C73, L4
Suggested Citation: Suggested Citation