Collusion in a price-quantity oligopoly

- We study collusion among firms that choose both prices and quantities.
- We compare a price cartel with a price-quota cartel.
- Price cartels always price below the monopoly price.
- A price-quota cartel is (almost) always preferred as the quota agreement allows firms to solve coordination and incentive problems and to avoid overproduction.

In the context of an infinitely repeated oligopoly game, we study collusion among firms that simultaneously choose prices and quantities. We compare a price cartel with a price-quota cartel and analyze when and why firms prefer the latter to the former. Output quota may be required to solve coordination and incentive problems when market demand is sufficiently elastic. If market demand is sufficiently inelastic, then the cartel faces a trade-off between increasing prices and the amount of costly overproduction. We find that a price cartel prices consistently below the monopoly price to mitigate excessive production. In this case, a quota arrangement allows firms to avoid overproduction and to sustain the monopoly price. From a policy perspective, our findings suggest that an overall price increase in conjunction with more stable prices and market shares is indicative of collusion in industries where production precedes sales and outputs are imperfectly observable.