Complete Versus Partial Collusion in Competing Coalitions
02 Mar 2015-International Game Theory Review (World Scientific Publishing Company)-Vol. 17, Iss: 01, pp 1540006
TL;DR: The results demonstrate that the cost advantage to the efficient producers decreases in the number of producers adopting the efficient technology, and the coalition stability related conditions need not imply better profitability for one type of producer vis-a-vis the other.
Abstract: In this paper, we develop a non-cooperative game theoretic model for our problem context in which the competing producers adopt one of the two alternate production and marketing technologies — efficient and inefficient. We examine stability related implications of the producers' decisions regarding the choices of (i) technologies, (ii) coalition formation, (iii) coalition form, (iv) intensity of collusion. The coalitions can adopt either complete collusion or partial collusion by determining intensity of collusion using endogenously determined sharing rules. The motivation for our study comes from the Costa Rican coffee industry and interesting findings presented in the existing literature focusing on a variety of competing-coalitions settings. Our results can be categorized as: (i) Nash equilibrium of the endogenously determined sharing rules, (ii) the equilibrium coalition forms, and (iii) stability of coalitions. They highlight the dynamics between the number of coalition producers and the cost of inefficiency. We show that the equilibrium sharing rules may have interior solutions and they are not necessarily (a)symmetric. We also show that both coalitions forming complete collusion of the respective producers in not always a Nash equilibrium, and the equilibrium coalition forms need not be (a)symmetric. Our main contribution to existing literature rests in determining the situations in which (i) competing players form coalitions, and (ii) they adopt the coalition form of either complete or partial collusion. Moreover, we provide an alternate explanation to why competing producers horizontally merge in the presence of a competing coalition adopting partial collusion in spite of the merger paradox. We also show that none of the two types of producers considered in this paper have any incentives in not making the information on their coalition form public. Moreover, we establish that situations yielding stable coalitions always exist. Our results demonstrate that the cost advantage to the efficient producers decreases in the number of producers adopting the efficient technology, and the coalition stability related conditions need not imply better profitability for one type of producer vis-a-vis the other. Our model essentially provides a platform for future research in a variety of competing-coalitions settings adopting endogenously determined sharing rules.
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TL;DR: In this paper, the authors adopt the framework of this literature and build on it by analyzing the size and uniqueness of the stable cartel when the fringe is Coumot, and the endogeneity of Courot versus Bertrand behavior within the fringe, given a stable cartel; possible endogeneity, Stackelberg sequence of play between the cartel and the fringe; and effects of excludability from the cartel Welfare effects are also briefly analyzed.
Abstract: The notion of an industry structure characterized by a small group of dominant firms plus a competitive fringe has a long tradition More recent work explores conditions under which such a pattern constitutes an equilibrium, assuming collusive behavior among one group of firms and price-taking behavior within the fringe [2; 3; 4; 5; 6; 14; 17] The alternative case of a Courot fringe is analyzed briefly in Spulber [22, 471-73] and more extensively in Martin [14] Here we adopt the framework of this literature and build on it by analyzing the size and uniqueness of the stable cartel when the fringe is Coumot; endogeneity of Courot versus Bertrand behavior within the fringe, given the stable cartel; possible endogeneity of the Stackelberg sequence of play between the cartel and the fringe; and effects of excludability from the cartel Welfare effects are also briefly analyzed Alternatively, cooperation within a cartel is equivalent to the outcome of horizontal mergers in the absence of synergies As such, this paper presents a contrasting result to the analysis of exogenous Cournot mergers in Salant, Switzer, and Reynolds [18], endogenizes the merger decision, and demonstrates how a theory of mergers can be predicated on a Cournot fringe
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TL;DR: A noncooperative game theoretic model is developed to examine network performance and stability related implications of allocation mechanisms that endogenously balance equity vis-à-vis equality and hence, the degree of collusion among the network firms in a decentralized setting and demonstrates that inefficiencies and instability of decentralization can be eliminated by incorporating an additional degree of freedom in the network formation game.
Abstract: We develop a noncooperative game theoretic model to examine network performance and stability related implications of allocation mechanisms that endogenously balance equity vis-a-vis equality, and hence, the degree of collusion among the network firms in a decentralized setting. We obtain the structural results and bounds for our model parameters in this regard by focusing on two important factors: (i) synergy between the firms, and (ii) the number of network firms. Our contribution to the existing literature is threefold in showing that: (i) perfect equality among the network firms can be suboptimal, (ii) explicit cooperation among the firms is not always necessary for the efficient network performance, and (iii) the network firms do not completely collude, and yet, network stability can be enhanced. By particularly modeling a two-tier network, we exhibit our results in a decentralized setting and highlight the role of a coordinating agent in enhancing competitiveness of the network firms. We demonstrate that inefficiencies and instability of decentralization can be eliminated by incorporating an additional degree of freedom in the network formation game. Our model and the structural results are applicable to networks such as producers’ cooperatives, cartels, exclusive production facilities, industrial clusters, joint production and research facilities, etc., wherein the conflicts of equity–equality and degree of collusion are predominant.
3 citations
Cites background from "Complete Versus Partial Collusion i..."
...Palsule-Desai (2015a) considers externality effects in the network formation games and provides insights into stability of such networks....
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...This aspect is not within the scope of this paper; a reader may refer to Palsule-Desai (2015b). scenarios—(i) S1: the firm with the highest cost (c3) competes independently, and the other two firms are in the network, (ii) S2: the firmwith the least cost (c1) competes independently, and the other…...
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...While Palsule-Desai et al. (2013), Palsule-Desai (2015a) also draw motivation from the Amul environment, their objectives are quite distinct from our focus in this paper....
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TL;DR: In this paper, the authors evaluate an unnoticed comparative-static implication of this approach: some exogenous mergers may reduce the endogenous joint profits of the firms that are assumed to collude.
Abstract: The consequences of a horizontal merger are typically studied by treating the merger as an exogenous change in market structure that displaces the initial Cournot equilibrium. In the new equilibrium the merged firm is assumed to behave like a multiplant Cournot player engaged in a noncooperative game against other sellers. The purpose of this article is to evaluate an unnoticed comparative-static implication of this approach: some exogenous mergers may reduce the endogenous joint profits of the firms that are assumed to collude. Cournot's original example is used to illustrate this and other bizarre results that can occur in the Cournot framework if the market structure is treated as exogenous.
1,455 citations
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TL;DR: In this paper, the authors analyzed horizontal mergers in Cournot oligopoly and found general conditions under which such mergers raise price, and showed that any merger not creating synergies raises price.
Abstract: The authors analyze horizontal mergers in Cournot oligopoly. They find general conditions under which such mergers raise price, and show that any merger not creating synergies raises price. The authors develop a procedure for analyzing the effect of a merger on rivals and consumers and, thus, provide sufficient conditions for profitable mergers to raise welfare. They show that traditional merger analysis can be misleading in its use of the Herfindahl Index. Their analysis stresses the output responses of large firms not participating in the merger. Copyright 1990 by American Economic Association.(This abstract was borrowed from another version of this item.)
1,154 citations
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TL;DR: In this paper, the authors examine the effect of mergers on the aggregate output of the entire economy and show that mergers can induce changes in the resulting aggregate output that can be used to influence the overall performance of the economy.
Abstract: UNIVERSITY OF CALIFORNIA, BERKELEY Department o f Economics Berkeley, C a l i f o r n i a Working Paper 8880 HORIZONTAL MERGERS: AN EQUILIBRIUM ANALYSIS Joseph F a r r e l l and C a r l Shapiro U.C. B e r k e l e y and P r i n c e t o n U n i v e r s i t y June 16, 1988 Key words: mergers, oligopoly. Abstract We a n a l y z e mergers as c o n c e n t r a t i o n - i n c r e a s i n g t r a n s f e r s o f industry-specific c a p i t a l among o l i g o p o l i s t s . Such c a p i t a l t r a n s f e r s a f f e c t i n d u s t r y s t r u c t u r e , and induce changes i n t h e subsequent o l i g o p o l i s t i c Cournot e q u i l i b r i u m . We p r o v i d e g e n e r a l c o n d i t i o n s under which they r a i s e t h e market p r i c e . We a l s o examine t h e s o c i a l and p r i v a t e i n c e n t i v e s t o merge, a c c o u n t i n g f o r the f a c t t h a t mergers a l t e r the d i s t r i b u t i o n o f outputs a c r o s s f i r m s as w e l l as the aggregate output l e v e l . We f i n d t h a t s m a l l f i r m s t y p i c a l l y have i n s u f f i c i e n t i n c e n t i v e s t o merge, while l a r g e f i r m s have e x c e s s i v e i n c e n t i v e s t o do so. In one r e a s o n a b l e s p e c i a l case, a merger i s s o c i a l l y more a t t r a c t i v e t h e more c o n c e n t r a t e d i s p r o d u c t i o n among t h e n o n - p a r t i c i p a n t f i r m s . JEL Classification:
1,031 citations
TL;DR: In this article, the authors investigate the gains from cartel formation and the stability of a dominant cartel for the price-leadership model and show that there is a general interest in the establishment of a cartel with the competitive fringe reaping a disproportionate share of the benefits.
Abstract: The gains from cartel formation and the stability of a dominant cartel are investigated for the price-leadership model. We show that there is a general interest in the establishment of a cartel with the competitive fringe reaping a disproportionate share of the benefits. In contrast to results involving a continuum of firms, with a finite number of firms (each with the same cost curve) there is always a stable dominant cartel. A propos de la stabilite d'une structure de marche caracterisee par la collusion de firmes dominantes pour etablir un leadership de prix. Le memoire etudie les gains derives de la formation d'un cartel et la stabilite d'un cartel dominant dans le cadre d'un modele de leadership de prix de la firme dominante. On montre qu'il y a un int6ret general a creer un cartel meme si les firmes satellites A la peripherie du cartel ramassent une part plus que proportionnelle des benefices. Contrairement a ce que l'on observe quand on est en presence d'un continuum de firmes, quand leur nombre est fini chacune avec la meme courbe de couts il y a toujours un cartel dominant stable.
846 citations
TL;DR: In this paper, the authors analyze the effects of cooperative research, whereby member firms agree to share the costs and fruits of a research project before they undertake it, and show that a royalty-free cross-licensing agreement among any number off firms lowers the equilibrium level of innovation even though it increases the efficiency of R&D through sharing.
Abstract: I analyze the effects of cooperative research, whereby member firms agree to share the costs andfruits of a research project before they undertake it. In this model industrywide agreements tend to have socially beneficial effects when the degree ofproduct market competition is low, when there are R&D spillovers in the absence of cooperation, when a high degree of sharing is technologically feasible, and when the agreement concerns basic research rather than development activities. I show that a royalty-free cross-licensing agreement among any number offirms lowers the equilibrium level of innovation even though it increases the efficiency of R&D through sharing.
814 citations