National University of Singapore

Horizontal Monopolization via Alliances: Where a Conspiracy Admits No More Than Four

Email address: ecsyjs@nus.edu.sg

Keywords: Vertical alliances, Core, Cooperative games.

JEL Classifications: C71, L12, L42

Abstract:
This paper asks the question: Is it possible for firms in a Cournot oligopolistic industry to conspire to monopolize the market by forming an alliance? In the case of a linear demand function, and making use of a modified concept of the core to take into account the possibility of outside players too forming coalitions, we show that a necessary condition for horizontal monopolization to occur is there be fewer than four firms in the industry. This result is not driven by the transaction costs of forming large alliances, nor the costs of coordinating and enforcing prices or production quota. Rather, it is the defection of sub-groups of firms that prevent firms from cooperating in an industry with five or more firms. This result contrasts with previous literature on horizontal alliances (in the form of horizontal mergers or cartels) which focuses on two central issues: stability (e.g., D'aspremont et al. [1983]) and profitability (e.g., Salant, Switzer and Reynolds [1983]) of horizontal alliances. Both strands of literature rely almost exclusively on noncooperative game-theoretic solution concepts, and a common result being that stable and profitable cartels of varying sizes exist.

PDF file of paper: yong.pdf

Session: Network Economics

Time: Sunday, 8 July, 8am - 9:30am

Room: A