How does the size of the non-colluding firms affect cartel sustainability?

What is it about?

We discuss the effects of the existence of non-colluding (fringe) firms on cartel sustainability. We obtain, using trigger strategies, that with product differentiation collusion is always more easily sustained when firms compete in prices than when firms compete in quantities. This is true basically because (i) price competition is more intense than quantity competition, and (ii) fringe firms exacerbate the fact that cartel firms have more incentives to deviate from the agreement under quantity competition. This result reverses previous findings where, in the absence of fringe firms, product differentiation plays a crucial role in determining the effectiveness of price or quantity competition in sustaining collusion.

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Why is it important?

Many cartels observed in real life do not include all the firms in the industry. Knowing how the existence of fringe firms affect collusion feasibility is therefore crucial.