Semicollusion vs. Full Collusion: The Role of Demand Uncertainty and Product Substitutability |
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Authors: | George Deltas Konstantinos Serfes |
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Institution: | (1) Department of Economics, University of Illinois, Champaign IL 61820, USA (e-mail: deltas@uiuc.edu), US;(2) Department of Economics, SUNY at Stony Brook, Stony Brook, NY 11794-4384 (e-mail: kserfes@notes.cc.sunysb.edu), US |
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Abstract: | We examine the profitability of two different cartel organizational forms: full collusion, under which firms collude on both price and quality, and semicollusion, under which firms collude on price only. We show that, in the presence of demand uncertainty that cannot be contracted upon
in the cartel agreement, firms may be better off limiting their collusive agreement to price only. However, a positive relationship
between demand uncertainty and the relative profitability of semicollusion exists only for low levels of demand substitutability. The converse is true for high levels of demand substitutability. Therefore, if
demand substitutability is sufficiently high, no level of demand uncertainty will make semicollusion the optimal organizational form. In contrast, semicollusion is guaranteed
to be optimal for a sufficiently low level of demand substitutability. The market structure described is motivated by and
closely parallels that of shipping cartels.
Received September 29, 2000; revised version received December 10, 2001 Published online: November 11, 2002 |
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Keywords: | : semicollusion market uncertainty cartels shipping conferences |
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