Nicolas de Roos

"A model of collusion timing"
JEL codes: L11, L41, C73
Keywords: collusion, dynamic games, entry, rules of thumb

Abstract: I develop a dynamic model of collusion, affording a substantial role to entry. Heterogeneous firms make collusion, entry, exit, and investment decisions within an evolving environment. The model is calibrated using demand and cost estimates from the lysine market, a market in which collusion recently played a dramatic role. The collusive agreement adopted is a rule of thumb, motivated by the details of collusion in the lysine market. The model provides one rationale for the emergence of a price war upon entry, and a means for examining the timing of the decision to reinstigate collusion. It is found that an entrant will wait until it has a market share comparable to its competitors before agreeing to collude. Allowing for collusive possibilities tends to yield a less concentrated industry with reduced consumer welfare. The model characterises events in the lysine market and could provide insights into markets with the potential for collusion and entry, and uncertainty about the characteristics of potential entrants.

Pre-publication pdf copy.