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Subgame Consistent Dormant-Firm Cartels

In: Dynamic Games: Theory and Applications

Author

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  • David W.K. Yeung

Abstract

Subgame consistency is a fundamental element in the solution of cooperative stochastic differential games. In particular, it ensures that the extension of the solution policy to a later starting time and any possible state brought about by prior optimal behavior of the players would remain optimal. Hence no players will have incentive to deviate from the initial plan. Recently a general mechanism for the derivation of payoff distribution procedures of subgame consistent solutions in stochastic cooperative differential games has been found. In this paper, we consider a duopoly in which the firms agree to form a cartel. In particular, one firm has absolute and marginal cost advantage over the other forcing one of the firms to become a dormant firm. A subgame consistent solution based on the Nash bargaining axioms is derived.

Suggested Citation

  • David W.K. Yeung, 2005. "Subgame Consistent Dormant-Firm Cartels," Springer Books, in: Alain Haurie & Georges Zaccour (ed.), Dynamic Games: Theory and Applications, chapter 0, pages 255-271, Springer.
    • Handle: RePEc:spr:sprchp:978-0-387-24602-4_13
    DOI: 10.1007/0-387-24602-9_13
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