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Collusion and Licensing in Oligopolies with Linear Marginal Operating Costs

Conference contribution
Authors Ted Lindblom
Aineas Mallios
Stefan Sjögren
Published in Paper presented at Wolpertinger 2019 meeting in Venice Italy, August 28-31, 2019
Publication year 2019
Published at Department of Business Administration, Industrial and Financial Management & Logistics
Language en
Keywords Collusion, cartels, patents, licensing, and quadratic marginal operating costs.
Subject categories Business Administration

Abstract

Oligopolistic competition is a quite common phenomenon in many industries, not least in the aviation, banking and telecom industries. In these industries, just a few firms are often dominant on the domestic markets as well as on the international arena. Not seldom, we can observe coordinated behavior between some or several of the firms in the form of, for example, alliances and/or cartels. Coordinated behavior can improve cost efficiency, prevent entry and create market power. For the firms coordinated behavior may be attractive if it increases their profit, while from the perspective of consumers collusion is of course undesirable when hampering competition. However, this is not necessarily the case. In this paper, we model and analyze coordinated behavior of competing firms in a Cournot setting. In standard models, it is assumed that firms have constant marginal operating costs and no fixed costs. We show that collusion might be beneficial from a societal standpoint when firms that operate under imperfect competition have linear marginal operating costs and fixed entry costs. Under certain conditions, coordinated firm behavior under Cournot oligopoly leads to higher industry profit and consumer welfare than uncoordinated behavior. Moreover, marginal operating costs that are sufficiently increasing in output enhance the incentives of firms to engage in technology transfer through licensing. Licensing might in some cases serve as an enforcing mechanism of coordinated behavior among innovating firms and increase the attractiveness of cartels

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