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Cartel stability under capacity constraints: the traditional view restored

By Volker Nocke

Abstract

The existence of a negative relationship between cartel stability and the level of excess capacity in an industry has for a long time been the dominant view in the traditional IO literature. Recent supergame-theoretic contributions (e.g. Brock and Scheinkman, 1985) appear to show that this view is ill-founded. Focussing on the issue of enforcement of cartel rules ('incentive contraints'), however, this literature completely ignores firms' 'participation constraints'. Reverting the focus of attention, the present paper restores the traditional view: large cartels will not be sustainable in periods of high excess capacity (low demand). In contrast to the supergame-theoretic literature, it predicts a negative relationship between excess capacity and the collusive price

Topics: HD Industries. Land use. Labor
Publisher: Suntory and Toyota International Centres for Economics and Related Disciplines, London School of Economics and Political Science
Year: 1999
OAI identifier: oai:eprints.lse.ac.uk:6751
Provided by: LSE Research Online

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