Tacit collusion and market concentration under network effects

- We consider infinitely repeated competition in a Cournot oligopoly with network effects.
- We find that the number of firms must be sufficiently large for firms to have the incentive to collude.
- We demonstrate that the relationship between market concentration and collusion sustainability depends on the strength of network effects and the number of firms.
- Under certain circumstances, higher market concentration can make collusion unstable.

In an infinitely repeated Cournot game with trigger strategy punishment, we demonstrate that the relationship between market concentration and collusion sustainability depends on the strength of network externalities. The latter is shown to interact with the number of firms and to affect the profitability of cooperation vs. competition, which delivers the result, challenging conventional wisdom, that lower market concentration can make collusion more stable.