Coordination in Oligopoly

Johan Stennek

Scandinavian Journal of Economics, 1997, vol. 99, issue 4, 541-554

Abstract: The private and social efficiency of two “behavioral” coordination mechanisms is examined in this paper. In Cournot oligopoly, firms prefer immediate coordination on the Nash equilibrium (interpreted as a preplay communication) over the best‐reply dynamics (and fictitous play) which converge to the equilibrium, but with delay (interpreted as a decentralized learning process). In Bertrand oligopoly, firms prefer the learning process. These results indicate that firms have incentives to create institutions, such as trade associations or informal meetings, to facilitate coordination of production capacities, but not prices. Moreover, quantity agreements may even increase social welfare.

Date: 1997
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