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Cartel Stability in a Dynamic Oligopoly

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  • BENCHEKROUN, Hassan
  • XUE, Licun

Abstract

We study the stability of cartels in a dynamic oligopoly. We use the differential game model of an oligopoly with sticky prices (Fershtman and Kamien 1987). We show that when firms use closed-loop strategies and the rate of increase of the marginal cost is "small enough", the grand coalition (i.e., when the cartel includes all firms) is stable: it is unprofitable for a firm to exit the cartel. Moreover we show that a cartel of 3 firms is stable for any positive rate of increase of the marginal cost: it is not profitable for an insider firm to exit the coalition, nor it is profitable for an outsider firm to join the coalition. When firms use open-loop strategies we show that no cartel is stable.

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Bibliographic Info

Paper provided by Centre interuniversitaire de recherche en économie quantitative, CIREQ in its series Cahiers de recherche with number 14-2005.

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Length: 22 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:mtl:montec:14-2005

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Keywords: stable cartel; mergers; dynamic oligopoly; differential games;

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References

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  1. Salant, Stephen W & Switzer, Sheldon & Reynolds, Robert J, 1983. "Losses from Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 98(2), pages 185-99, May.
  2. Hassan Benchekroun, 2003. "The closed-loop effect and the profitability of horizontal mergers," Canadian Journal of Economics, Canadian Economics Association, vol. 36(3), pages 546-565, August.
  3. Tsutsui, Shunichi & Mino, Kazuo, 1990. "Nonlinear strategies in dynamic duopolistic competition with sticky prices," Journal of Economic Theory, Elsevier, vol. 52(1), pages 136-161, October.
  4. Seade, J, 1985. "Profitable Cost Increases and the Shifting of Taxation : Equilibrium Response of Markets in Oligopoly," The Warwick Economics Research Paper Series (TWERPS) 260, University of Warwick, Department of Economics.
  5. d'ASPREMONT, Claude & JACQUEMIN, Alexis & GABSZEWICZ, Jean J. & WEYMARK, John A., . "On the stability of collusive price leadership," CORE Discussion Papers RP -522, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. Fershtman, Chaim & Kamien, Morton I, 1987. "Dynamic Duopolistic Competition with Sticky Prices," Econometrica, Econometric Society, vol. 55(5), pages 1151-64, September.
  7. Effrosyni Diamantoudi, 2005. "Stable cartels revisited," Economic Theory, Springer, vol. 26(4), pages 907-921, November.
  8. Dockner,Engelbert J. & Jorgensen,Steffen & Long,Ngo Van & Sorger,Gerhard, 2000. "Differential Games in Economics and Management Science," Cambridge Books, Cambridge University Press, number 9780521637329, October.
  9. 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.
  10. Dockner, Engelbert J. & Gaunersdorfer, Andrea, 2001. "On the profitability of horizontal mergers in industries with dynamic competition," Japan and the World Economy, Elsevier, vol. 13(3), pages 195-216, August.
  11. Dockner, Engelbert J, 1992. "A Dynamic Theory of Conjectural Variations," Journal of Industrial Economics, Wiley Blackwell, vol. 40(4), pages 377-95, December.
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