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Article: Does market demand volatility facilitate collusion?

TitleDoes market demand volatility facilitate collusion?
Authors
KeywordsCartel defections
Market demand volatility
Real options
Issue Date2008
PublisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/ecmod
Citation
Economic Modelling, 2008, v. 25 n. 4, p. 696-703 How to Cite?
AbstractThis paper develops a real options model of a price-setting cartel under uncertainty to examine whether market demand volatility facilitates collusion or not. We show that there is a critical level of market demand (the optimal defection trigger) above which firms find it desirable to defect from the cartel. We show further that an increase in the underlying market demand uncertainty has two opposing effects on the optimal defection trigger. First, the increased market demand volatility gives rise to the usual positive effect on option value that lifts up the optimal defection trigger. Second, the increased market demand volatility calls for an upward adjustment of the discount rate and thus creates a negative effect on option value that pushes down the optimal defection trigger. We show that the negative effect dominates (is dominated by) the positive effect when the underlying market demand uncertainty is trivial (significant), thereby rendering a U-shaped pattern of the optimal defection trigger against the market demand volatility. © 2007 Elsevier B.V. All rights reserved.
Persistent Identifierhttp://hdl.handle.net/10722/60172
ISSN
2015 Impact Factor: 0.997
2015 SCImago Journal Rankings: 0.815
ISI Accession Number ID
References

 

DC FieldValueLanguage
dc.contributor.authorWong, KPen_HK
dc.date.accessioned2010-05-31T04:05:13Z-
dc.date.available2010-05-31T04:05:13Z-
dc.date.issued2008en_HK
dc.identifier.citationEconomic Modelling, 2008, v. 25 n. 4, p. 696-703en_HK
dc.identifier.issn0264-9993en_HK
dc.identifier.urihttp://hdl.handle.net/10722/60172-
dc.description.abstractThis paper develops a real options model of a price-setting cartel under uncertainty to examine whether market demand volatility facilitates collusion or not. We show that there is a critical level of market demand (the optimal defection trigger) above which firms find it desirable to defect from the cartel. We show further that an increase in the underlying market demand uncertainty has two opposing effects on the optimal defection trigger. First, the increased market demand volatility gives rise to the usual positive effect on option value that lifts up the optimal defection trigger. Second, the increased market demand volatility calls for an upward adjustment of the discount rate and thus creates a negative effect on option value that pushes down the optimal defection trigger. We show that the negative effect dominates (is dominated by) the positive effect when the underlying market demand uncertainty is trivial (significant), thereby rendering a U-shaped pattern of the optimal defection trigger against the market demand volatility. © 2007 Elsevier B.V. All rights reserved.en_HK
dc.languageengen_HK
dc.publisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/ecmoden_HK
dc.relation.ispartofEconomic Modellingen_HK
dc.rightsEconomic Modelling. Copyright © Elsevier BV.en_HK
dc.rightsCreative Commons: Attribution 3.0 Hong Kong License-
dc.rightsNOTICE: this is the author’s version of a work that was accepted for publication in <Economic Modelling>. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in PUBLICATION, [VOL 25, ISSUE 4, (2008)] DOI 10.1016/j.econmod.2007.10.010-
dc.subjectCartel defectionsen_HK
dc.subjectMarket demand volatilityen_HK
dc.subjectReal optionsen_HK
dc.titleDoes market demand volatility facilitate collusion?en_HK
dc.typeArticleen_HK
dc.identifier.openurlhttp://library.hku.hk:4550/resserv?sid=HKU:IR&issn=0264-9993&volume=25&spage=696&epage=703&date=2008&atitle=Does+Market+Demand+Volatility+Facilitate+Collusion?en_HK
dc.identifier.emailWong, KP: kpwongc@hkucc.hku.hken_HK
dc.identifier.authorityWong, KP=rp01112en_HK
dc.description.naturepostprint-
dc.identifier.doi10.1016/j.econmod.2007.10.010en_HK
dc.identifier.scopuseid_2-s2.0-43849110444en_HK
dc.identifier.hkuros142248en_HK
dc.relation.referenceshttp://www.scopus.com/mlt/select.url?eid=2-s2.0-43849110444&selection=ref&src=s&origin=recordpageen_HK
dc.identifier.volume25en_HK
dc.identifier.issue4en_HK
dc.identifier.spage696en_HK
dc.identifier.epage703en_HK
dc.identifier.isiWOS:000257272100009-
dc.publisher.placeNetherlandsen_HK
dc.identifier.scopusauthoridWong, KP=7404759417en_HK

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