54 Pages Posted: 20 Apr 2020
Date Written: March 24, 2020
This paper offers a theoretical model for the analysis of illegal cartels. Given the nature of the cartel, retaliation is also illegal. To assess the stability of collusion as a criminal organization, we propose a one-shot game based on Bertrand competition with product differentiation. We confirm our conjectures on both the cartel's internal and external stability through numerical solutions. Depending on market parameters, the cartel remains stable with up to six homogeneous firms. By introducing cost asymmetry that number is significantly higher, and the collusion proves to be increasing in the share of high-cost firms in the market.
Keywords: Criminal behavior, deviation and retaliation, cartel stability, illegal activity
JEL Classification: C72, D21, D43, K21, L13
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