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Welfare-enhancing collusion in the presence of a competitive fringe

Juan-Pablo Montero and Juan Ignacio Guzman

August 2005

Juan-Pablo Montero and Juan Ignacio Guzman, August 2005

Following the structure of many commodity markets, we consider a reduced number of large firms and a competitive fringe of many small suppliers choosing quantities in an infinite horizon setting subject to demand shocks. We show that a collusive agreement among the large firms may not only bring an output contraction but also an output expansion (relative to the non-collusive output level). The latter occurs during booms, when the fringe’s market share is more important, and is due to the strategic substitutability of quantities (we will never observe an output-expanding collusion in a price-setting game). In addition and depending on the fringe’s market share the time at which collusion is most difficult to sustain can be either at booms or recessions.

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