Collusion Under Risk Aversion and Fixed Costs

Dan Bernhardt, Mahdi Rastad

Research output: Contribution to journalArticlepeer-review

Abstract

We analyze collusion under demand uncertainty by risk-averse cartels that care about the utility derived from profits. With sufficient risk aversion and non-trivial fixed operating costs, it becomes difficult for cartels to collusively restrict output both when demand is low and marginal dollars are highly valued, and when demand is high and potential defection profits are high: output relative to monopoly levels becomes a U-shaped function of demand. Greater risk aversion or higher fixed operating costs make collusion more difficult to support in recessions, but easier to support in booms.

Original languageEnglish (US)
Pages (from-to)808-834
Number of pages27
JournalJournal of Industrial Economics
Volume64
Issue number4
DOIs
StatePublished - Dec 1 2016

ASJC Scopus subject areas

  • Accounting
  • Business, Management and Accounting(all)
  • Economics and Econometrics

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