Semicollusion vs. full collusion: The role of demand uncertainty and product substitutability

George Deltas, Konstantinos Serfes

Research output: Contribution to journalArticlepeer-review

Abstract

We examine the profitability of two different cartel organizational forms: full collusion, under which firms collude on both price and quality, and semicollusion, under which firms collude on price only. We show that, in the presence of demand uncertainty that cannot be contracted upon in the cartel agreement, firms may be better off limiting their collusive agreement to price only. However, a positive relationship between demand uncertainty and the relative profitability of semicollusion exists only for low levels of demand substitutability. The converse is tree for high levels of demand substitutability. Therefore, if demand substitutability is sufficiently high, no level of demand uncertainty will make semicollusion the optimal organizational form. In contrast, semicollusion is guaranteed to be optimal for a sufficiently low level of demand substitutability. The market structure described is motivated by and closely parallels that of shipping cartels.

Original languageEnglish (US)
Pages (from-to)111-139
Number of pages29
JournalJournal of Economics/ Zeitschrift fur Nationalokonomie
Volume77
Issue number2
DOIs
StatePublished - Nov 1 2002

Keywords

  • Cartels
  • Market uncertainty
  • Semicollusion
  • Shipping conferences

ASJC Scopus subject areas

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

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