Cartel Stability by a Margin

By Timo Klein & Maarten Pieter Schinkel (University of Amsterdam)

Firms may engage in collusion only if they are better off by a sufficiently wide margin. Such a cartel safety margin can cover costs of colluding and insure participants against risky aspects of it, such as unforeseeable changes in market conditions, unpredictable internal tensions, sharpened public enforcement or inestimable liability for antitrust damages. Accounting for a required margin provides new unambiguous comparative statics of variations in market characteristics on cartel stability where these are otherwise not a priori available. The margin reduces the comparative negative effect that a change in the gain from deviating following a market structure change has on cartel stability. More specifically, we find that both lower marginal cost and reduced product differentiation increase cartel stability. Implications for competition policy include that merger efficiencies may increase the risk of coordinated effects.

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