Sustaining Collusion in Growing Markets
I thank an anonymous coeditor of this Journal, two anonymous referees, Andrea Amelio, Pierpaolo Battigalli, Joe Harrington, Xavier Mas, Massimo Motta, Lars Persson, Patrick Rey, Robert Rothschild, Lucy White, and seminar participants at the 2005 EARIE Conference (Porto), the 2006 IIOC (Boston), European University Institute, Faculdade de Economia do Porto and at the Portuguese Competition Authority for their valuable comments on earlier versions of this paper. Special thanks are due to Karl Schlag for many insightful discussions and precious help in the more technical parts of the paper. All errors remain my own responsibility. Part of the research reported here was carried out while I was visiting the European University Institute (Florence). I express my appreciation for their hospitality. An earlier version of this paper was awarded with the Young Economist's Prize at the 2005 EARIE Conference.
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Abstract
The impact of demand growth on the collusion possibilities is investigated in a Cournot supergame where market growth may trigger future entry and the collusive agreement is enforced by the most profitable ‘grim trigger strategies’ available. It is shown that even in situations where perfect collusion can be sustained after entry, coping with a potential entrant in a market which is growing over time may completely undermine any pre‐entry collusive plans of the incumbent firms. This is because, before entry, a deviation and the following punishment phase may become more attractive thanks to their additional effect in terms of delaying entry.
