Collusion-Enhancing Institutions in Dispersed Oligopolies ∗ Luca Colombo † Michele Grillo ‡ April 2007 Abstract Collusion in oligopoly is a fit subject for analysing how institutions help coordinate Pareto-improving social behavior. This notwithstanding, eco- nomic analysis has devoted little attention to the institutional underpin- nings of collusion behavior. Deliberate institutional design is particularly needed when the number of firms is large since, under such conditions, factors that facilitate collusion must be manipulated through artificial arrangements, to overcoming the “critical discount rate” becoming smaller as the number of firms increases. In this paper we claim that a typi- cal institutional arrangement to sustain collusion in dispersed industries calls for an artificial control of the firms’ marginal cost function. First, we provide a novel result to show that, in a dynamic Cournot model, un- der decreasing returns, collusion can always be sustained in equilibrium for any given discount factor provided the marginal cost function is suffi- ciently steep. Moreover, as the number of firms increases, the aggregate collusive profits remain bounded away from zero and the degree of collu- sion remains constant and strictly greater than one. Second, we provide evidence of collusion-enhancing institutions of this kind in dispersed indus- tries and discuss how the results obtained can improve our understanding of “facilitating practices” in antitrust analysis. ∗ We thank Angelo Baglioni, Luigi Brighi, Giacomo Calzolari, Mario Forni, Joe Harrington, Lara Magnani, Daniela Marchesi, Gianmaria Martini, Massimo Motta, Jorge Padilla, Michele Polo, Pierluigi Sabbatini and Giancarlo Spagnolo for insightful comments and suggestions on a previous draft of the paper. † Catholic University; Largo A. Gemelli 1, I-20123 Milano; Phone: +39-02-7234.2637; Fax: +39-02-7234.2781; E-mail: lucava.colombo@unicatt.it ‡ Catholic University; Largo A. Gemelli 1, I-20123 Milano; Phone: +39-02-7234.2440; Fax: +39-02-7234.2781; E-mail: michele.grillo@unicatt.it 1