Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

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Friday, March 19, 2010

Simulation and Prosecution of a Cartel with Endogenous Cartel Formation

Posted by D. Daniel Sokol

Johannes Paha (Justus-Liebig-University Gießen) describes Simulation and Prosecution of a Cartel with Endogenous Cartel Formation.

ABSTRACT: In many cases, collusive agreements are formed by asymmetric firms and include only a subset of the firms active in the cartelized industry. This paper endogenizes the process of cartel formation in a numeric simulation model where firms differ in marginal costs and production technologies. The paper models the incentive to collude in a differentiated products Bertrand-oligopoly. Cartels are the outcomes of a dynamic formation game in mixed strategies. I find that the Nash-equilibrium of this complex game can be obtained efficiently by a Differential Evolution stochastic optimization algorithm. It turns out that large firms have a higher probability to collude than small firms. Since firms' characteristics evolve over time, the simulation is used to generate data of costs, prices, output-quantities, and profits. This data forms the basis for an evaluation of empirical methods used in the detection of cartels.

http://lawprofessors.typepad.com/antitrustprof_blog/2010/03/simulation-and-prosecution-of-a-cartel-with-endogenous-cartel-formation-.html

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