TEL  Vol.2 No.3 , August 2012
Entry and Collusion after Market Opening
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.
Keywords: Entry; Collusion
Cite this paper: F. Boffa and D. Vannoni, "Entry and Collusion after Market Opening," Theoretical Economics Letters, Vol. 2 No. 3, 2012, pp. 316-322. doi: 10.4236/tel.2012.23058.

[1]   F. Boffa, V. Pingali and D. Vannoni, “Increasing Market Interconnection: An Analysis of the Italian Electricity Spot Market,” International Journal of Industrial Organization, Vol. 28, No. 3, 2010, pp. 311-322. doi:10.1016/j.ijindorg.2009.10.003

[2]   D. Kreps and J. Scheinkman, “Cournot Pre-Commitment and Bertrand Competition Yields Cournot Outcome,” Bell Journal of Economics, Vol. 14, 1983, pp. 326-337. doi:10.2307/3003636

[3]   W. Brock and J. Scheinkman, “Price Setting Supergames with Capacity Constraints,” Review of Economic Studies, Vol. 52, No. 3, 1985, pp. 371-382. doi:10.2307/2297659

[4]   C. Davidson and R. Deneckere, “Excess Capacity and Collusion,” International Economic Review, Vol. 31, No. 3, 1990, pp. 521-541. doi:10.2307/2527159

[5]   J. P. Benoit and V. Krishna, “Dynamic Duopoly: Prices and Quantities,” Review of Economic Studies, Vol. 54, No. 1, 1987, pp. 32-35. doi:10.2307/2297443

[6]   A. M. Spence, “Entry, Capacity, Investment and Oligopolistic Pricing”, Bell Journal of Economics, Vol. 8, No. 2, 1977, pp. 534-544. doi:10.2307/3003302

[7]   A. Dixit, “The Role of Investment in Entry Deterrence,” Economic Journal, Vol. 90, No. 357, 1989, pp. 95-106. doi:10.2307/2231658

[8]   J. P. Benoit and V. Krishna, “Entry Deterrence and Dynamic Competition: The Role of Capacity Reconsidered,” International Journal of Industrial Organization, Vol. 9, No. 4, 1991, pp. 477-495.