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Stochastic evolutionary cartel formation

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  • Darong DAI

    (Nanjing University, Nanjing)

  • Kunrong SHEN

    (Nanjing University, Nanjing)

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    Abstract

    This paper employs the evolutionary dynamics driven by the Moran process (a special birth-death process) to investigate endogenous cartel formation from the perspective of stochastic evolution of the underlying industry. A Prisoner’s Dilemma game is derived based on the Cournot competition between any two firms. Moreover, in a repeated setting, we consider the normal-form game between two well-known behavior modes: cooperative strategy tit-for-tat (TFT) and non- cooperative strategy always defect (ALLD). We then give the corresponding conditions under which full collusion and partial collusion are established, respectively, in stochastic evolutionary sense. Finally, both the threshold of discount factor and the threshold of industry concentration are endogenously determined in the model.

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    Bibliographic Info

    Article provided by Asociatia Generala a Economistilor din Romania - AGER in its journal Theoretical and Applied Economics.

    Volume (Year): XVIII(2014) (2014)
    Issue (Month): 1(590) (January)
    Pages: 7-26

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    Handle: RePEc:agr:journl:v:1(590):y:2014:i:1(590):p:7-26

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    Keywords: Endogenous cartel; Cournot competition; Prisoner’s Dilemma; Repeated game; Evolutionary game theory.;

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    1. Helder Vasconcelos, 2005. "Tacit Collusion, Cost Asymmetries, and Mergers," RAND Journal of Economics, The RAND Corporation, vol. 36(1), pages 39-62, Spring.
    2. Franco Malerba, 2005. "Innovation and the evolution of industries," KITeS Working Papers 172, KITeS, Centre for Knowledge, Internationalization and Technology Studies, Universita' Bocconi, Milano, Italy, revised Jul 2005.
    3. Iwan Bos & Joseph E. Harrington, Jr, 2010. "Endogenous cartel formation with heterogeneous firms," RAND Journal of Economics, RAND Corporation, vol. 41(1), pages 92-117.
    4. Compte, Olivier & Jenny, Frederic & Rey, Patrick, 2002. "Capacity constraints, mergers and collusion," European Economic Review, Elsevier, vol. 46(1), pages 1-29, January.
    5. Drew Fudenberg & Lorens A. Imhof, 2004. "Imitation Processes with Small Mutations," Harvard Institute of Economic Research Working Papers 2050, Harvard - Institute of Economic Research.
    6. Cabral, Luís M B & Mata, José, 2001. "On the Evolution of the Firm Size Distribution: Facts and Theory," CEPR Discussion Papers 3045, C.E.P.R. Discussion Papers.
    7. Marc Escrihuela Villar, 2008. "A note on cartel stability and endogenous sequencing with tacit collusion," DEA Working Papers 29, Universitat de les Illes Balears, Departament d'Economía Aplicada.
    8. Fudenberg, Drew & Imhof, Lorens A., 2008. "Monotone imitation dynamics in large populations," Journal of Economic Theory, Elsevier, vol. 140(1), pages 229-245, May.
    9. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
    10. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
    11. Escrihuela-Villar, Marc, 2008. "Partial coordination and mergers among quantity-setting firms," International Journal of Industrial Organization, Elsevier, vol. 26(3), pages 803-810, May.
    12. Prokop, Jacek, 1999. "Process of dominant-cartel formation," International Journal of Industrial Organization, Elsevier, vol. 17(2), pages 241-257, February.
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