Collusion sustainability with a capacity-constrained firm

Abstract We study an infinitely repeated oligopoly game in which firms compete on quantity and one of them is capacity-constrained. We show that collusion sustainability is non-monotonic in the size of the capacity-constrained firm, which has little incentive to deviate from a cartel. We also present conditions for the emergence of a partial cartel, with the capacity-constrained firm being excluded by the large firms or self-excluded. In the latter case, we show under which circumstances the small firm induces a partial conspiracy that is Pareto-dominant. Implications for cartel identification and enforcement are finally discussed.