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The Impact of Persistent Shocks and Concave Objective Functions on Collusive Behavior

Author

Listed:
  • Johannes Paha

    (University of Giessen)

Abstract
The model proposed in this paper explains three stylized facts derived from case evidence: Cartel formation is more likely (i) when the industry has been hit by a negative profitability shock under the condition that (ii) this shock is rather persistent. (iii) This pattern is independent from the type of the shock, i.e. cost shocks, demand shocks etc. The paper analyzes the incentive for cartel formation when the industry switches between a good state with high profits and a bad state with low profits. The transition between states is modeled by a Markov-process that allows for transitory or persistent shocks. The decision maker incurs opportunity costs of collusion and chooses the conduct of a firm in order to maximize the present value of a concave objective function. The model shows that depending on the value of the opportunity costs and the discount factor collusion can be stable in no, one, or both states of the industry. When collusion is stable in only one state, this is the good state when industry conditions are transitory. When industry conditions are persistent, collusion is stable in the bad state.

Suggested Citation

  • Johannes Paha, 2013. "The Impact of Persistent Shocks and Concave Objective Functions on Collusive Behavior," MAGKS Papers on Economics 201328, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    • Handle: RePEc:mar:magkse:201328
    as

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    File URL: https://www.uni-marburg.de/en/fb02/research-groups/economics/macroeconomics/research/magks-joint-discussion-papers-in-economics/papers/2013-papers/28-2013_paha.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    cartel formation; collusion; concavity; persistence;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • M20 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - General

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