"Collusion sustainability with a capacity-constrained firm"

How does the stability of full and partial cartels depend on the capacity constraint of a small firm (or a fringe of small firms)?

In their recent publication in "Oxford Economic Papers", Leonardo Madio, (Department of Economics and Management, University of Padua) and Aldo Pignataro (Italian Regulatory Authority for Energy, Networks and Environment), provide a rationale for the emergence of cooperative agreements and how their sustainability is shaped by the size of the small firm. This kind of analysis is particularly relevant to design effective anti-cartel enforcement and to study policy interventions against capacity withholding. They explore the link between capacity and collusion and identify conditions for the emergence of a partial cartel in which either the small firm is excluded or is self-excluded. They also point out when the small firm can induce a Pareto dominant solution by inducing a partial cartel between un constrained firms. They use this infinitely repeated oligopoly model to suggest some policy implications for cartel identification and enforcement.

Read the full article here