Cooperative agreements and conflicts of interest

Abstract

A traditional classification in game theory is based on a distinction between cooperative and non-cooperative situations. The theory has made clear that this classification does not rely so much on whether or not communication is possible but on the distinction between the agreements based on some outside enforcement mechanism and the agreements that are self-enforcing. It seems fair to say that the use of the non-cooperative concepts, mainly the Nash equilibrium and its multiple variants including Selten’s ‘perfection’ concepts, has been predominant in the application of game theory to industrial organization. Over the last years however, an increasing number of cooperative solution concepts have been applied to market analyses. Furthermore there has been an effort to implement cooperative solutions via some kind of noncooperative (i.e., self-enforcing) agreement, reflecting the fact that, in some economic situations, the cooperative or non-cooperative nature of observed arrangements is, at the very least, debatable. This special issue of the European Economic Review on ‘Market Competition, Conflict and Collusion’ offers a set of articles illustrating this expanding research on the characteristics and conditions of oligopolistic cooperation in imperfect markets. The first paper by M. Kurz develops a theory of coordination mechanisms specifying the additional properties that an agreement, implemented as a Nash equilibrium of some non-cooperative game, should have. Then the problem of oligopoly cooperation is viewed as analogous to a public good allocation problem since, for each firm, the outputs of the others may be viewed as a public bad. The main result is to show that the set of cooperative oligopoly equilibria (or Lindahl equilibria of the oligopoly model) is equivalent to the set of implementable agreements. In the second paper, B. MacLeod uses the notion of conscious parallelism to analyse how oligopolists might tacitly collude. Using the methodology of bargaining theory, he axiomatically selects a rule of thumb corresponding to conscious parallelism, namely the matching of price changes, and in-