The conventional wisdom is that cartels which merely lead to lower production levels and higher prices are detrimental to social welfare. This paper explores the extent to which this is generally valid. We derive necessary and sufficient conditions for the existence of a hard core cartel that is beneficial for firms and society at large. Considering both strong (with side payments) and weak (without side payments) hard core cartel contracts, we find that (i) both strong and weak welfare-enhancing cartels exist when at least one firm makes a loss on part of its sales in competition, (ii) a welfare-enhancing strong cartel exists whenever there is a difference in unit cost at competitive production levels, and (iii) a welfare-enhancing weak cartel exists when the profit margin on all sales is positive and the cost difference is sufficiently large.
a b s t r a c tWe study a framework where two duopolists compete repeatedly in prices and where chosen prices potentially affect future market shares, but certainly do not affect current sales. This assumption of consumer inertia causes (noncooperative) coordination on high prices only to be possible as an equilibrium for low values of the discount factor. High discount factors increase opportunism and aggressiveness of competition to such an extent that high prices are no longer sustainable as an equilibrium outcome. Moreover, we find that both monopolization and enduring market share and price fluctuations (price wars) can be equilibrium path phenomena without requiring exogenous shocks in market or firm characteristics.
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We consider a model of dynamic price competition to analyze the impact of consumer inertia on the ability of firms to sustain high prices. Three main consequences are identified: (i ) maintaining high prices does not require punishment strategies when firms are sufficiently myopic, (ii ) if buyers are sufficiently inert, then high prices can be sustained for all discount factors, and (iii ) the ability to maintain high prices may depend nonmonotonically on the level of the discount factor. These results provide a number of valuable insights with regard to competitive and collusive pricing behavior. For example, our findings suggest that measures aiming at lowering the degree of consumer inertia may in fact facilitate collusion in network industries.
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