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Cooperation in the Presence of an Advantaged Outsider

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  • Cheikbossian, Guillaume
  • Mahenc, Philippe

Abstract

This paper analyzes how the stability of the tacit cooperation within a fringe of sev- eral identical ?rms is affected by the presence of a more e¢ cient ?rm which does not take part in their cooperative agreement. The model assumes that the ?rms of the fringe adopt ?stick and carrot?strategies à la Abreu (1986, 1988) to support cooperation, while the outside ?rm plays its one-period best response function to these strategies, regardless of the history of play. Assuming a linear demand function and constant marginal costs, we then obtain conditions for the coopera- tion within the fringe to be sustainable and focus on the most cooperative symmetric punishment (MCSP) that sustains cooperation. We show that the MCSP is harsher when the number of ?rms involved in the agreement is relatively large or when their relative cost disadvantage is relatively small. However, both a larger number of ?rms and a larger cost disadvantage make it more di¢ cult to sustain the cooperation.

Suggested Citation

  • Cheikbossian, Guillaume & Mahenc, Philippe, 2012. "Cooperation in the Presence of an Advantaged Outsider," TSE Working Papers 13-390, Toulouse School of Economics (TSE).
  • Handle: RePEc:tse:wpaper:27138
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    References listed on IDEAS

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    1. Motta,Massimo, 2004. "Competition Policy," Cambridge Books, Cambridge University Press, number 9780521016919, December.
    2. de Roos, Nicolas, 2004. "A model of collusion timing," International Journal of Industrial Organization, Elsevier, pages 351-387.
    3. de Roos, Nicolas, 2006. "Examining models of collusion: The market for lysine," International Journal of Industrial Organization, Elsevier, pages 1083-1107.
    4. Harrington, Joseph E, Jr, 1991. "The Determination of Price and Output Quotas in a Heterogeneous Cartel," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(4), pages 767-792, November.
    5. Rothschild, R., 1999. "Cartel stability when costs are heterogeneous," International Journal of Industrial Organization, Elsevier, pages 717-734.
    6. Abreu, Dilip, 1986. "Extremal equilibria of oligopolistic supergames," Journal of Economic Theory, Elsevier, vol. 39(1), pages 191-225, June.
    7. Helder Vasconcelos, 2005. "Tacit Collusion, Cost Asymmetries, and Mergers," RAND Journal of Economics, The RAND Corporation, pages 39-62.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Repeated Game; Tacit Collusion; Optimal Punishments; Cost Asymmetry; Outsider;

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • 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

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