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Cartel Stability In A Dynamic Oligopoly With Sticky Prices

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  • Hassan Benchekroun
  • Licun Xue

Abstract

We study the stability of cartels in a differential game model of 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, 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 the grand coalition is never stable; moreover, we show that only a cartel of size 2 can be stable and it is so only when the rate of increase of the marginal cost is large enough.

Suggested Citation

  • Hassan Benchekroun & Licun Xue, 2006. "Cartel Stability In A Dynamic Oligopoly With Sticky Prices," Departmental Working Papers 2005-08, McGill University, Department of Economics.
    • Handle: RePEc:mcl:mclwop:2005-08
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    1. 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.
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    4. Seade, J., 1985. "Profitable Cost Increases and the Shifting of Taxation: Equilibrium Responses of Markets in Oligopoly," Economic Research Papers 269225, University of Warwick - Department of Economics.
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    11. Hassan Benchekroun, 2003. "The closed‐loop effect and the profitability of horizontal mergers," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 36(3), pages 546-565, August.
    12. 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, Enero-Abr.
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    Cited by:

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    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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