Edited by Joseph E. Harrington Jr and Yannis Katsoulacos
Chapter 7: Social-Welfare-Enhancing Collusion and Trade
George Deltas, Alberto Salvo and Helder Vasconcelos1 7.1 INTRODUCTION This chapter offers additional results and extensions derived from the model in Deltas, Salvo and Vasconcelos (2012). That paper, which at the request of an editor focused on the consumer welfare effect of collusion, developed a model of geographically separated markets in which two horizontally differentiated goods are sold by cost asymmetric suppliers. The source of the cost asymmetry is spatial, in that in a given market a ‘home firm,’ with production facilities located in the market, competes with a ‘foreign firm’ that, to bring its differentiated product to market, needs to incur an additional cost of trade from its offshore plant. Our motivation, then as well as now, is: (1) the observation that several real world cartels have adopted a ‘home-market principle,’ whereby cartelized firms enjoy large shares in their home markets (Motta 2004; Harrington 2006),2 combined with (2) off-the-record speculation by executives in the Brazilian cement industry that spatial cartels, by curbing competitive cross-hauling, can raise social welfare. In Deltas et al. (2012), we show that consumer surplus and social welfare can increase on shifting from oligopolistic competition to full collusion (monopoly). Section 7.2 of this chapter briefly lays out the basic model of that paper. We then add an analysis of first-best social outcomes (Section 7.3) to the existing derivation of equilibrium outcomes under a Nash equilibrium in prices (imperfect competition) and the joint-profit maximizing cartel (full collusion). We show that a social planner would...
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