Engel, Christoph --- "Competition as a Socially Desirable Dilemma – Theory v. Experimental Evidence" [2011] ELECD 350; in Drexl, Josef; Kerber, Wolfgang; Podszun, Rupprecht (eds), "Competition Policy and the Economic Approach" (Edward Elgar Publishing, 2011)

Book Title: Competition Policy and the Economic Approach

Editor(s): Drexl, Josef; Kerber, Wolfgang; Podszun, Rupprecht

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781848448841

Section: Chapter 13

Section Title: Competition as a Socially Desirable Dilemma – Theory v. Experimental Evidence

Author(s): Engel, Christoph

Number of pages: 25

Extract:

13. Competition as a socially desirable
dilemma ­ theory v. experimental
evidence
Christoph Engel*

Cartels are inherently instable. Each cartelist is best off if it breaks the
cartel, while the remaining firms remain loyal. If firms interact only once,
if products are homogenous, if firms compete in price, and if marginal cost
is constant, theory even predicts that strategic interaction forces firms to
set the market clearing price. For society, this would be welcome news.
Without antitrust intervention, the market outcome maximizes welfare.
The argument becomes even stronger if the opposite market side has a
chance to defend itself; if imposing harm on the opposite market side is
salient; if it is clear that cartels are at variance with normative expectations
prevalent in society. There is an equally long list of reasons, though, why
such optimism might be unwarranted: capacity is limited; interaction is
repeated, and the end is uncertain; firms might be willing to run a limited
risk of being exploited by their competitors, hoping that the investment
pays. This chapter explores the question both theoretically and experimen-
tally. In the interest of capitalizing on a rich body of experimental find-
ings, and on the concept of conditional cooperation in particular, I offer a
formal model that interprets oligopoly as a linear public good.


1. RESEARCH QUESTION

You are facing a dilemma ­ what a mess! Your opponent is facing a
dilemma ­ what a relief! This is the situation of cartel members v. cartel
authorities. For cartel members, keeping prices high, ...