Cartel Stability by a Margin
27 Pages Posted: 19 Mar 2018 Last revised: 15 Jun 2019
Date Written: June 2019
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: Suggested Citation