Stable cartel configurations and product differentiation: The case of multiple cartels

Abstract

We develop a framework to analyse stable cartelisation when firms can form multiple cartels. This contrasts with the existing literature which generally assumes, without further justification, that at most one cartel may form. We define cartelisation to be stable in the multiple cartels framework if: (i) a firm in a cartel does not find it more profitable to leave the cartel and operate independently, (ii) a firm that operates independently does not find it more profitable to join an existing cartel, (iii) a firm in a cartel does not find it more profitable to join another existing cartel or form a new cartel with an independent firm, and (iv) two independent firms do not find it more profitable to form a new cartel. In the context of quantity competition in differentiated markets, we show that a single cartel is never stable whenever multiple cartels may be formed. We completely characterise the stable cartelisation structure — there is at most one firm that is not a part of any cartel while each of the remaining firms is part of a two-firm cartel. The implication for competition policy is that efforts towards the detection of cartels should also be directed at smaller cartels that may operate in less concentrated markets rather than only on large dominant cartels in concentrated markets.