Competitive advantage and collusive optima

Abstract

Cost differences may often be important in real oligopolies. If side payments are impossible the standard cartel objective, total industry profits, lacks plausibility when costs differ. This essay considers plausible alternatives. Four different technologies for effecting collusion, which are essentially identical when costs are equal, define sets of possible profits. Axiomatic bargaining models are used to select unconstrained optima from among these possibilities. Simple functional forms are employed. Low-cost firms with large shares in Cournot equilibrium may have little to gain from collusion. If collusion is effective, low cost firms will have relatively low estimated conjectural variations.