Competitive Prices as Profit-Maximizing Cartel Prices

Posted by D. Daniel Sokol

Harold Houba, VU University Amsterdam - Department of Econometrics, Tinbergen Institute Evgenia Motchenkova, VU University Amsterdam - Department of Economics, TILEC Quan Wen, Vanderbilt University - College of Arts and Science - Department of Economics describe Competitive Prices as Profit-Maximizing Cartel Prices.

ABSTRACT: Even under antitrust enforcement, firms may still form a cartel in an infinitely-repeated oligopoly model when the discount factor is sufficiently close to one. We present a linear oligopoly model where the profit-maximizing cartel price converges to the competitive equilibrium price as the discount factor goes to one. We then identify a set of necessary conditions for this seemingly counter-intuitive result.