« Competition in complementary goods: Airport handling markets and Council Directive 96/67/EC | Main | Should Antitrust Condemn Tying Arrangements That Increase Price Without Restraining Competition?: A Response to Einer Elhauge's 'Tying, Bundled Discounts, and the Death of the Single Monopoly Profit Theory' »
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.
March 19, 2010 | Permalink
TrackBack URL for this entry:
Listed below are links to weblogs that reference Simulation and Prosecution of a Cartel with Endogenous Cartel Formation :