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Entry and Collusion after Market Opening
University of Macerata and Hermes, Torino, Italy
Faculty of Economics, University of Torino and Collegio Carlo Alberto, Torino, Italy
- 1 University of Macerata and Hermes, Torino, Italy
- 2 Faculty of Economics, University of Torino and Collegio Carlo Alberto, Torino, Italy
Theoretical Economics Letters·Volume 02 (2012)·Pages 316–322·Published 2 August 2012·DOI10.4236/tel.2012.23058
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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.
KeywordsEntryCollusion
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