This paper analyzes cartel stability when firms are farsighted. It studies a price leadership model a la D' Aspremont et al. (1983), where the dominant cartel acts as a leader by determining the market price, while the fringe behaves competitively. According to D' Aspremont et al.'s (1983) approach a cartel is stable if no firm has an incentive to either enter or exit the cartel. In deciding whether to deviate or not, a firm compares its status quo with the outcome its unilateral deviation induces. However, the firm fails to examine whether the induced outcome will indeed become the new status quo that will determine its profits. Although the firm anticipates the price adjustment following its deviation, it ignores the possibility that more firms may exit (or enter) the cartel that may eventually stabilize in a very different situation from the one the firm riginally induced. In other words, the firm does not consider the fact that the outcome immediately induced by its deviation may not be stable itself. We propose a notion of cartel stability that allows firms to fully foresee the result of their deviation. Our solution concept is built in the spirit of von Neumann and Morgenstern's (1944) stable set, while it modifies the dominance relation following Harsanyi's (1974) criticism.We show that there always exists a unique, non-empty set of stable cartels and provide an algorithm the determines it.
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Paper provided by School of Economics and Management, University of Aarhus in its series Economics Working Papers with number
2001-9.
Find related papers by JEL classification: C79 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Other D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection D49 - Microeconomics - - Market Structure and Pricing - - - Other L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Donsimoni, Marie-Paule & Economides, Nicholas S & Polemarchakis, Herakles M, 1986.
"Stable Cartels,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(2), pages 317-27, June.
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