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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: D43 L13 L12 C72 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-com, nep-ind and nep-mic
Date: 2006-09
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Working Paper: Cartel Stability in a Dynamic Oligopoly (2005) Downloads
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