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Stable cartels revisited

  • Effrosyni Diamantoudi

    ()

This paper analyzes cartel stability when firms are farsighted. It studies a price leadership model á 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. 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. Copyright Springer-Verlag Berlin/Heidelberg 2005

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File URL: http://hdl.handle.net/10.1007/s00199-004-0550-0
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Article provided by Springer in its journal Economic Theory.

Volume (Year): 26 (2005)
Issue (Month): 4 (November)
Pages: 907-921

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Handle: RePEc:spr:joecth:v:26:y:2005:i:4:p:907-921
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  1. 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.
  2. R.Rothschild, . "The Stability Of Dominant-Group Cartels," Working Papers ec5/92, Department of Economics, University of Lancaster.
  3. Licun Xue, 1998. "Coalitional stability under perfect foresight," Economic Theory, Springer, vol. 11(3), pages 603-627.
  4. R. Rothschild, . "On the Limits to the Growth of Coalitions by Means of Transfers," Working Papers ec11/95, Department of Economics, University of Lancaster.
  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. Prokop, Jacek, 1999. "Process of dominant-cartel formation," International Journal of Industrial Organization, Elsevier, vol. 17(2), pages 241-257, February.
  7. John C. Harsanyi, 1974. "An Equilibrium-Point Interpretation of Stable Sets and a Proposed Alternative Definition," Management Science, INFORMS, vol. 20(11), pages 1472-1495, July.
  8. Donsimoni, Marie-Paule, 1985. "Stable heterogeneous cartels," International Journal of Industrial Organization, Elsevier, vol. 3(4), pages 451-467, December.
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