Cartel Stability by a Margin

Abstract

We study cartel stability when firms maintain collusion only if it is more profitable than competition by a sufficiently large margin. Accounting for an (endogenous) cartel margin suggests new unambiguous comparative statics of changes in market characteristics on the scope for stable cartels. The margin increases their effect on the gain from collusion, relative to the gain from deviation. More specifically, we find that when there is a (small) cartel margin, both lower industry marginal cost and less product differentiation can increase cartel stability. The common conjecture that collusion is more prevalent in homogeneous goods and low cost industries–which has no basis in existing cartel theory–is canonically true when firms require even only a small cartel margin. Implications for competition policy include a focus in enforcement on standardized product-low input cost industries. In merger control, efficiencies may increase the risk of coordinated effects.