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Anticipated Collusion and Excess Capacity

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  • James A. Brander
  • Richard Harris

Abstract

This paper examines an industry where output is determined collusively, with output shares allocated on the basis of relative capacity. Capacity is chosen non-cooperatively, providing an apparently clear incentive for firms to install excess capacity. Although excess capacity equilibria (ECE) may arise, capacity constrained equilibria (CCE) will occur from some parameter values. However, if an ECE occurs, firms will be strictly worse off under this partial cooperation than in the fully non-cooperative setting: partial collusion does more harm than good. The Stackleberg solution coincides with the symmetric Nash equilibrium in the ECE. Entry deterrence is also considered.

Suggested Citation

  • James A. Brander & Richard Harris, 1983. "Anticipated Collusion and Excess Capacity," Working Paper 530, Economics Department, Queen's University.
    • Handle: RePEc:qed:wpaper:530
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    Cited by:

    1. Lars-Hendrik Röller & Frode Steen, 2006. "On the Workings of a Cartel: Evidence from the Norwegian Cement Industry," American Economic Review, American Economic Association, vol. 96(1), pages 321-338, March.
    2. Davidson, Carl & Deneckere, Raymond J, 1990. "Excess Capacity and Collusion," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(3), pages 521-541, August.
    3. Reinoud Joosten, 2015. "Long-run Strategic Advertising and Short-run Bertrand Competition," International Game Theory Review (IGTR), World Scientific Publishing Co. Pte. Ltd., vol. 17(02), pages 1-24.
    4. Harris, Richard G., 1989. "Contingent Protection, and the International Distribution of Excess Capacity," Queen's Institute for Economic Research Discussion Papers 275220, Queen's University - Department of Economics.

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