Monday, March 19, 2012
Posted by D. Daniel Sokol
Eric Avenel, University of Rennes 1 and Stephane Caprice, Toulouse School of Economics (GREMAQ, INRA) have a paper on Collusion and downstream entry in a vertically integrated industry.
ABSTRACT: We analyse the impact of an entry threat at the downstream level on the ability of a pair of vertically integrated incumbents to collude. We present an original model of horizontal product differentiation on the final market and characterize the structures of this market for which an entry threat facilitates collusion between incumbents. While the entry threat leaves collusion and deviation profits unchanged, it lowers profits in punishment periods. Consequently, an entry threat discourages deviations and facilitates collusion, thus benefiting incumbents.