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This article analyzes the strategic decisions of firms whether to establish and adhere to a cartel when they can also shape competition by investing into production capacity while being subject to unexpected demand shocks with persistence. The model shows that a negative demand shock can...
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This article provides a framework for the analysis of cartel formation. It models the strategic interaction among firms who invest into production capacity, sell a near-homogeneous good, and are subject to unexpected demand shocks with persistence. The firms either compete or collude in prices....
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investment game formulated in continuous time in which reduced-form profits are subject to industry shocks. We show that the … theory of marginal Tobin's q still holds in capital-accumulation games under uncertainty if the strategic externalities of … rivals' investment are properly accounted for …
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