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Cartel Stability in a Dynamic Oligopoly

Hassan Benchekroun () and Licun Xue ()

Cahiers de recherche from Centre interuniversitaire de recherche en économie quantitative, CIREQ

Abstract: We study the stability of cartels in a dynamic oligopoly. We use the differential game model of an 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 we show that 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 we show that no cartel is stable.

Keywords: stable cartel; mergers; dynamic oligopoly; differential games (search for similar items in EconPapers)
JEL-codes: D43 L13 L12 C72 (search for similar items in EconPapers)
Date: 2005
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Related works:
Working Paper: CARTEL STABILITY IN A DYNAMIC OLIGOPOLY WITH STICKY PRICES (2006) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:mtl:montec:14-2005

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