Internal Organization of Firms and Cartel Formation

Posted by D. Daniel Sokol

Jerome Kuipers (Maastricht University) and Norma Olaizola (UPV/EHU) address Internal Organization of Firms and Cartel Formation.

ABSTRACT: We study the endogenous formation of cartels in two contexts. Firt, we considere internal-external stability based models which, due to firms' free-riding incentives, lead to the formation of very small stable cartels (if any). Second, we introduce the dynamic aspect of coalition formation. That is, when considering a cartel we take into account also any other cartel that can be reached through a succesion of moves. We apply notions such as the generalized stable sets and the absorbing sets solutions which predict that collusion of the whole industry can occur with some regularity. Then we apply the two approaches to a Cournot game, and study the influence that the internal organization of firms has on the size of the cartels that form by means of a compariso between a situation where ownership and management are not separated and one in which they are.