Consumer‐surplus‐enhancing collusion and trade
An earlier version of this article was circulated under the title “Welfare‐Enhancing Collusion and Trade.” We would like to thank Marco Castaneda, Judy Chevalier, Juan Delgado, Joe Harrington, Johannes Horner, Jun Ishii, Sajal Lahiri, Qihong Liu, Massimo Motta, Marco Ottaviani, Jason Pearcy, Rob Porter, Alexander Rasch, Fiona Scott Morton, Yossi Spiegel, Jonathan Vogel, Alison Watts, Michael Whinston, and seminar participants at the Advances in Industrial Organisation Workshop (Vienna), CRESSE, EARIE, the International Industrial Organization Conference, Jornadas de Economía Industrial, Southern Illinois University, Tulane University, and the Yale Applied Microeconomics Summer Lunch Workshop for helpful comments. We are also grateful to the editor and to the referees for their thoughtful comments. Financial support from the Spanish Ministry of Science (ECO2008‐01300) and from the Portuguese Ministry of Science and Technology (PTDC/EGE‐ECO/099784/2008) is gratefully acknowledged. All errors are our own.
Abstract
That collusion among sellers hurts buyers is a central tenet in economics. We provide an oligopoly model in which collusion can raise consumer surplus. A differentiated‐product duopoly operates in two geographically separated markets. Each market is home to a single firm, but can import, at a cost, from the foreign firm. Under some circumstances, a perfect cartel, relative to duopolistic competition, raises the price of the imported good and lowers the price of the home good. This raises welfare for most consumers and increases aggregate consumer surplus. A similar possibility result applies to autarky. Our analysis applies beyond the spatial setting.
