Question

In: Economics

1. For many years, the container shipping industry has had a large amount of unused capacity....

1. For many years, the container shipping industry has had a large amount of unused capacity. Would this unused capacity make it easier or harder for firms in the industry to collude? Explain.

2. Discuss the importance of information for effective tacit collusion. What kind of information do firms need and why?

Solutions

Expert Solution

Unused capacity makes it easier for firms to collude.


Let us say that firms have decided to collude. Thus they have artificially pushed up prices and reduced offering of capacity. Now to break away from this collusion, one of the firms need to offer more capacity. Since it has a lot of idle capacity, it can easily deviate. However, once it does this, the payout of the other firms fall as this firm hogs the market share. So the other firms will also want to offer more capacity. Since all the firms have a lot of idle capacity, it becomes very easy for firms to offer their capacity and thus punish the defector.

So the defector cannot get any benefit out of deviating away from the collusion. Rather the payout will fall immediately as all the other firms have got capacity lying with them which they will immediately deploy. So there is no incentive to deviate. Thus it becomes easy to maintain a collusion.

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Rahul Sunny answered 8 months ago
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