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- Title
Is capital a collusion device?
- Authors
Feuerstein, Switgard; Gersbach, Hans
- Abstract
We examine how irreversible capital reduces the possibility of a duopoly to sustain implicit collusion by grim strategies, when the product is homogenous and firms compete in quantities. Compared with the case of reversible capital, there are two countervailing effects: Deviation from an existing collusion is less attractive, because capital once installed causes costs forever. But the punishment will also be less severe due to the high capacity the deviating firm can build before punishment starts. The last effect dominates, meaning that the commitment value of capital is negative for all firms. If capital is irreversible, collusion breaks down for realistic magnitudes of interest rates.
- Subjects
CAPITAL; DUOPOLIES; ANTITRUST law; COMPETITION; MONETARY policy; ECONOMIC indicators; INTEREST rates; ECONOMIC policy
- Publication
Economic Theory, 2003, Vol 21, Issue 1, p133
- ISSN
0938-2259
- Publication type
Article
- DOI
10.1007/s00199-001-0249-4