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Equilibrium Binding Agreements under Diverse Bahavioral Assumptions

  • Effrosyni Diamantoudi


    (Department of Economics, University of Aarhus, Denmark)

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.

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Handle: RePEc:aah:aarhec:2001-9
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  1. Michael Rosholm & Michael Svarer, . "Structurally Dependent Competing Risks," Economics Working Papers 2000-11, School of Economics and Management, University of Aarhus.
  2. Debraj Ray & Rajiv Vohra, 1998. "A Theory of Endogenous Coalition Structures," Working Papers 98-1, Brown University, Department of Economics, revised Jan 1998.
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  4. Ray, Debraj & Vohra, Rajiv, 1997. "Equilibrium Binding Agreements," Journal of Economic Theory, Elsevier, vol. 73(1), pages 30-78, March.
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  8. Effrosyni Diamantoudi & Licun Xue, 2003. "Farsighted stability in hedonic games," Social Choice and Welfare, Springer, vol. 21(1), pages 39-61, 08.
  9. Jakob Roland Munch & Michael Svarer, . "Mortality and Socio-economic Differences in a Competing Risks Model," Economics Working Papers 2001-1, School of Economics and Management, University of Aarhus.
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  12. Effrosyni Diamantoudi, . "Equilibrium Binding Agreements under Diverse Bahavioral Assumptions," Economics Working Papers 2001-2, School of Economics and Management, University of Aarhus.
  13. 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.
  14. Licun Xue, 1998. "Coalitional stability under perfect foresight," Economic Theory, Springer, vol. 11(3), pages 603-627.
  15. Claude d'Aspremont & Alexis Jacquemin & Jean Jaskold Gabszewicz & John A. Weymark, 1983. "On the Stability of Collusive Price Leadership," Canadian Journal of Economics, Canadian Economics Association, vol. 16(1), pages 17-25, February.
  16. Moulin, Herve, 1994. "Social choice," Handbook of Game Theory with Economic Applications, in: R.J. Aumann & S. Hart (ed.), Handbook of Game Theory with Economic Applications, edition 1, volume 2, chapter 31, pages 1091-1125 Elsevier.
  17. Skott, Peter & Auerbach, Paul, 2000. "Skill asymmetries, increasing wage inequality and unemployment," Economics Discussion Papers 2000-9, School of Economics, Kingston University London.
  18. Jamsheed Shorish, . "Quasi-Static Macroeconomic Systems," Economics Working Papers 2000-3, School of Economics and Management, University of Aarhus.
  19. Licun Xue, . "Stable Agreements in Infinitely Repeated Games," Economics Working Papers 2000-13, School of Economics and Management, University of Aarhus.
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