Abstract
In this paper, we use a partition function form game to analyze cartel formation among firms in Cournot competition. We assume that a firm obtains a certain cost advantage that allows it to produce goods at a lower unit cost. We show that if the level of the cost advantage is “moderate”, then the firm with the cost advantage leads the cartel formation among the firms. Moreover, if the cost advantage is relatively high, then the formed cartel can also be stable in the sense of the core of a partition function form game. We also show that if the technology for the low-cost production can be copied, then the cost advantage may prevent a cartel from splitting.
Highlights
Many approaches have been proposed to analyze cartel formation
As shown by the title of his paper, “A simple model of imperfect competition, where 4 are few and 6 are many”, this result suggests that cartel formation depends deeply on the number of firms in a market
We have shown that the result of cartel formation depends on the level of the cost advantage a firm attains
Summary
Many approaches have been proposed to analyze cartel formation. Ref. [1] first introduced a simple noncooperative game to study cartel formation among firms. [5] uses a partition function form game to study an endogenously stable coalition structure in Cournot competition. This phenomenon is known as the “merger paradox” in Cournot competition According to this standard model, firms may have no incentive to form their coalitions, while many cartels are reported in our actual market.. If the cost advantage is very large (namely, 1 < ), firm 1 no longer needs to merge with firm 2: it is more profitable for firm 1 to produce goods alone by taking advantage of the very low cost The latter two cases still suggest the merger paradox in two different ways, while the first case suggests the possibility of endogenous cartel formation. We apply the core of a partition function form game to discuss stable coalition structures.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
