Consumer-Surplus-Enhancing Collusion and Trade

Abstract

That collusion among sellers hurts buyers is a central tenet in economics. We provide an oligopoly model in which collusion can raise consumer surplus. A differentiated-product duopoly operates in two geographically-separated markets. Each market is home to a single firm, but can import, at a cost, from the foreign firm. Under some circumstances, a perfect cartel, relative to duopolistic competition, raises the price of the imported good and lowers the price of the home good. This raises welfare for most consumers and increases aggregate consumer surplus. A similar possibility result applies to autarky. Our analysis applies beyond the spatial setting.

Keywords: Cross-hauling, Cartels, Monopoly, Consumer Surplus, Market Allocation Schemes, Home-market Principle, Two-way Trade, Autarky, Systems Competition

JEL Classification: F12, L41, D43