Stability of multiple cartels in differentiated markets

Abstract We characterise stable market structures under price competition in differentiated markets when multiple cartels may form – this is a marked departure from the predominant assumption in the existing literature that supposes without further justification that at most one cartel may be formed. We find that market structures without cartelisation are never stable and, in stark contrast to the above-mentioned a priori assumption made in the literature, we establish that in markets that are sufficiently differentiated, whenever the formation of multiple cartels is possible (i.e. there are at least four firms in the market), at least one market structure involving multiple small cartels is stable. Furthermore, except for the case where there are only four firms in the market, stable market structures are exclusively characterised by multiple small cartels. Combined with the result that the unique stable market structure under quantity competition is also characterised by multiple small cartels, this underscores the importance of considering the possibility of multiple cartels in competition policy. Comparing stable market structures under price and quantity competition, we find that prices and profits are higher under price competition whenever the market is sufficiently differentiated or sufficiently concentrated.