Internal cartel stability with time-dependent detection probabilities ☆ Jeroen Hinloopen ⁎ University of Amsterdam (and Tinbergen Institute) and Economics Network for Competition and Regulation (ENCORE), The Netherlands Available online 19 June 2006 Abstract To account for the illegal nature of price-fixing agreements, per-period detection probabilities that can vary over time are introduced in a dynamic oligopoly. The resulting ICCs for internal cartel stability indicate that for discount factors up to 10% per-period detection probabilities of 5% are needed to reduce the number of cartel members by 50%. For the special case of stationary supergames with constant per- period detection probabilities p elegant rules emerge: internal cartel stability requires the discount factor to increase with 100 × p /(1 - p) percent while a fixed fine of 100 × (1 - p)/ p percent of incremental cartel profits is required for making the ICC always binding. © 2006 Elsevier B.V. All rights reserved. JEL Classification: L12; L41 Keywords: Internal cartel stability; Trigger strategy; Detection probabilities; Non-stationary supergames 1. Introduction Ever since the writings of Adam Smith economists are aware of firms' desire for coordinating their actions towards higher profits, coordination that typically is at the expense of consumer welfare. In his often-quoted intuition as to these coordinated actions Smith talks of International Journal of Industrial Organization 24 (2006) 1213 – 1229 www.elsevier.com/locate/econbase ☆ Thanks are due to Roy Epstein, Joe Harrington, Morten Hvidd, Massimo Motta, Karl Schlag, Adriaan Soetevent, Frank Verboven and seminar participants at the Dutch Antitrust Authority (November 2002), the Katholieke Universiteit Leuven (February 2003), the University of Copenhagen (March 2004), Maastricht University (March 2004), the European University Institute (October 2004), the University of Amsterdam (February 2005), and at the annual conferences of the EUNIP (December 2002), of the IOS (April 2003), and of the EARIE (August 2003). All errors are mine. ⁎ University of Amsterdam, Roetersstraat 11, 1018 WB Amsterdam, The Netherlands. E-mail address: J.Hinloopen@uva.nl. URL: http://www.fee.uva.nl/io/jhinloopen. 0167-7187/$ - see front matter © 2006 Elsevier B.V. All rights reserved. doi:10.1016/j.ijindorg.2006.04.005