Subgame Consistent Dormant-Firm Cartels

David W.K. Yeung

Chapter Chapter 13 in Dynamic Games: Theory and Applications, 2005, pp 255-271 from Springer

Abstract: Abstract Subgame consistency is a fundamental element in the solution of cooperative stochastic differential games. In particular, it ensures that the extension of the solution policy to a later starting time and any possible state brought about by prior optimal behavior of the players would remain optimal. Hence no players will have incentive to deviate from the initial plan. Recently a general mechanism for the derivation of payoff distribution procedures of subgame consistent solutions in stochastic cooperative differential games has been found. In this paper, we consider a duopoly in which the firms agree to form a cartel. In particular, one firm has absolute and marginal cost advantage over the other forcing one of the firms to become a dormant firm. A subgame consistent solution based on the Nash bargaining axioms is derived.

Keywords: Dynamic Stability; Cooperative Game; Dynamic Game; Optimality Principle; Nash Bargaining Solution (search for similar items in EconPapers)
Date: 2005
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-0-387-24602-4_13

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DOI: 10.1007/0-387-24602-9_13

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