Journal of Dynamics and Games (JDG)

The profit-sharing rule that maximizes sustainability of cartel agreements

Pages: 143 - 151, Volume 3, Issue 2, April 2016      doi:10.3934/jdg.2016007

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João Correia-da-Silva - Toulouse School of Economics, 21 Allée de Brienne, 31000 Toulouse, France (email)
Joana Pinho - CEF.UP, Faculdade de Economia, Universidade do Porto, Rua Dr. Roberto Frias, 4200-464 Porto, Portugal (email)

Abstract: We study the profit-sharing rule that maximizes the sustainability of cartel agreements when firms can make side-payments. This rule is such that the critical discount factor is the same for all firms (``balanced temptation''). If a cartel applies this rule, contrarily to the typical finding in the literature, asymmetries among firms may increase the sustainability of the cartel. In an illustrating example of a Cournot duopoly with asymmetric production costs, the sustainability of collusion is maximal when firms are extremely asymmetric.

Keywords:  Collusion, critical discount factor, asymmetric firms, side-payments, balanced temptation.
Mathematics Subject Classification:  Primary: 91A80; Secondary: 91A20.

Received: October 2015;      Revised: April 2016;      Available Online: April 2016.