Tuesday, March 21, 2017

Sustainability of Product Market Collusion Under Credit Market Imperfections

Sugata Marjit, Centre for Studies in Social Sciences, Calcutta; City University of Hong Kong (CityUHK) - Department of Economics & Finance, Arijit Mukherjee, University of Nottingham - School of Economics, and Lei Yang , Hong Kong Polytechnic University examine Sustainability of Product Market Collusion Under Credit Market Imperfections.

ABSTRACT: We study the implications of credit constraints for the sustainability of product market collusion in a bank-financed oligopoly in which firms face an imperfect credit market. We consider two situations, without and with credit rationing, i.e., with a binding credit limit. When there is credit rationing, a moderately higher cost of external financing may affect the degree of collusion, but a substantial increase keeps it unaffected relative to the no-constraint case. A permanent adverse demand shock in this setup does not affect the possibility of collusion, but may aggravate financing constraints and eventually lead to collusion. We consider both Cournot and Bertrand models, and the results are qualitatively the same.


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