- Market-induced rationalization and welfare enhancing cartels
- CeNDEF Working Paper
- Number of pages
- Universiteit van Amsterdam
- Document type
- Working paper
- Faculty of Economics and Business (FEB)
- Amsterdam School of Economics Research Institute (ASE-RI)
We show that incomplete cartels in quantity-setting oligopolies may increase welfare, without any effi ciencies or synergies being internalized by cartel formation. The main intuition is that the cartel has an incentive to contract output and that the firms outside the cartel react to this by expanding output. If the outsiders are more efficient than the cartel firms average production costs go down. Even for relatively moderate differences in efficiency total welfare may increase due to this market-induced rationalization.
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