Cartel Stability by a Margin

27 Pages Posted: 19 Mar 2018 Last revised: 15 Jun 2019

See all articles by Timo Klein

Timo Klein

University of Amsterdam - Amsterdam School of Economics (ASE)

Maarten Pieter Schinkel

University of Amsterdam - Department of Economics; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Date Written: June 2019

Abstract

We study cartel stability when firms maintain collusion only if it is more profitable than competition by a sufficiently large margin - which can be due, for example, to the risk of cartel break-down, antitrust liabilities or cost of colluding. Accounting for a cartel margin provides new unambiguous comparative statics of changes in market characteristics on the scope for stable cartels - for which we specify the (endogenous) bounds. The margin increases their effect on the gain from collusion, relative to the gain from deviation. More specifically, we find that when there is a cartel margin, both lower industry marginal cost and less product differentiation can increase cartel stability. That collusion may be more prevalent in low cost industries is contrary to the view that efficiencies are pro-competitive, as for example expressed in the US and EU Merger Guidelines. The common conjecture that product homogeneity facilitates collusion we show to be canonically true only when firms require a cartel margin. Implications for competition policy include a focus in enforcement on standardized product-low input cost industries. In merger control, efficiencies may increase the risk of coordinated effects.

Keywords: cartel, stability, marginal cost, product differentiation

JEL Classification: K21, L13, L41

Suggested Citation

Klein, Timo and Schinkel, Maarten Pieter, Cartel Stability by a Margin (June 2019). Amsterdam Law School Research Paper No. 2018-06; Amsterdam Center for Law & Economics Working Paper No. 2018-02. Available at SSRN: https://ssrn.com/abstract=3142025 or http://dx.doi.org/10.2139/ssrn.3142025

Timo Klein (Contact Author)

University of Amsterdam - Amsterdam School of Economics (ASE) ( email )

Roetersstraat 11
Amsterdam, North Holland 1018 WB
Netherlands

Maarten Pieter Schinkel

University of Amsterdam - Department of Economics ( email )

Roetersstraat 11
1018 WB Amsterdam
Netherlands
+31 20 525 7132 (Phone)
+31 20 525 5318 (Fax)

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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