Review of Industrial Organization 24: 219–241, 2004.
© 2004 Kluwer Academic Publishers. Printed in the Netherlands.
Entry Effects on Cartel Stability and the Joint
IGIER, Università Bocconi, Via Salasco 5, 20136 Milano, Italy,
Abstract. We extend Green and Porter’s (1984) model to consider entry, by studying two alternative
types of incumbent ﬁrms’ post-entry reactions: cartel breakdown and accommodation of the entrants.
We show that cooperation is more unstable if entry costs are low and if incumbents accommodate
the new ﬁrms. We then test the applicability of the theoretical model to the type of collusion that
characterizes the nineteenth-century railroad cartel in the US. The results provide support for the
model predictions. In particular, cartel stability has been found to be negatively correlated with the
number of ﬁrms in the agreement.
Key words: Cartel stability, entry, joint executive committee
JEL classiﬁcations: L41, L92
The objective of this paper is twofold. From a theoretical perspective, the paper
contributes to the analysis of entry effects on cartel stability under demand un-
certainty. From a more applied perspective, we empirically test some theoretical
predictions about how entry can affect the pattern of collusive behavior of a group
of ﬁrms organized in a cartel agreement to coordinate prices, making use of data
on the US railroad cartel of the turn-of-the century.
We develop an extended version of the model proposed by Green and Porter
(1984). In their seminal article, Green and Porter analyze inﬁnitely repeated oligo-
poly games where market demand is subject to exogenous shocks and the ﬁrm’s
(past) actions are not observable, but they do not consider the possibility of entry.
We thus reexamine their model to understand how the stability of the collusive price
structure can be inﬂuenced by an increase in the number of ﬁrms in the agreement
or by the existence of a pool of potential competitors.
The framework we use in order to explicitly model the entry process is related
to Harrington (1989). Two types of collusive equilibria are studied in a repeated
Bertrand game (with random demand and unobservable prices) between a set of
active ﬁrms and a set of potential competitors that can enter the market by paying
a one-time, ﬁxed, sunk cost (entry cost). In a collusive equilibrium, the initially