Advantageous Semi-Collusion

The textbook view that cartels increase industry profits and lower consumer welfare ignores the effects of competition in other activities. A revisionist view shows that when cartel members compete in other activities, i.e. when they semi-collude, the cartel members may be worse off and consumers better off. Using a two-stage model in which the non-production activity is R&D and is subject to technological spillovers, we show that both the traditional and revisionist views can be wrong, that consumers and producers can both be made worse off, or both better off, by a semi-collusive production cartel.