Entry and Collusion after Market Opening

DOI: 10.4236/tel.2012.23058   PDF   HTML     3,983 Downloads   6,261 Views  

Abstract

We analyze a setting typical of industries right after liberalization, or after structural demand and technology changes. An incumbent firm has an exogenous capacity, and a new entrant has to set its capacity level. We find that, in a dynamic context, higher capacity increases the severity of punishment after deviation, thereby favoring the emergence of cartels. The cartel in this case could hurt welfare, not only because of the standard deadweight loss motive, but also because of the cost inefficiency due to high and idle capacity. We conjecture that a competitive arrangement could be both welfare enhancing and profit-maximizing for the incumbent.

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F. Boffa and D. Vannoni, "Entry and Collusion after Market Opening," Theoretical Economics Letters, Vol. 2 No. 3, 2012, pp. 316-322. doi: 10.4236/tel.2012.23058.

Conflicts of Interest

The authors declare no conflicts of interest.

References

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