CARTEL STABILITY IN A DYNAMIC OLIGOPOLY WITH STICKY PRICES

Hassan Benchekroun and Licun Xue ()

Departmental Working Papers from McGill University, Department of Economics

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.

JEL-codes: C72 D43 L12 L13 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2006-09
New Economics Papers: this item is included in nep-bec, nep-com, nep-ind and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Cartel Stability in a Dynamic Oligopoly (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:mcl:mclwop:2005-08

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