Download this Paper Open PDF in Browser

Collusion at the Extensive Margin

31 Pages Posted: 28 Sep 2010 Last revised: 24 Apr 2014

Martin C. Byford

RMIT University - School of Economics, Finance and Marketing

Joshua S. Gans

University of Toronto - Rotman School of Management; NBER

Multiple version iconThere are 2 versions of this paper

Date Written: April 22, 2014

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 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

Byford, Martin C. and Gans, Joshua S., Collusion at the Extensive Margin (April 22, 2014). Available at SSRN: https://ssrn.com/abstract=1683342 or http://dx.doi.org/10.2139/ssrn.1683342

Martin C. Byford

RMIT University - School of Economics, Finance and Marketing ( email )

445 Swanston St.
Melbourne, Victoria 3000
Australia

Joshua S. Gans (Contact Author)

University of Toronto - Rotman School of Management ( email )

Canada

HOME PAGE: http://www.joshuagans.com

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Paper statistics

Downloads
126
Rank
181,700
Abstract Views
1,273