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Cooperation in the Presence of an Advantaged Outsider

Cheikbossian, Guillaume and Mahenc, Philippe (2012) Cooperation in the Presence of an Advantaged Outsider. TSE Working Paper, n. 13-390, Toulouse

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This paper analyzes how the stability of the tacit cooperation within a fringe of sev-
eral identical ?rms is affected by the presence of a more e¢ cient ?rm which does not take part
in their cooperative agreement. The model assumes that the ?rms of the fringe adopt ?stick and
carrot?strategies à la Abreu (1986, 1988) to support cooperation, while the outside ?rm plays its
one-period best response function to these strategies, regardless of the history of play. Assuming
a linear demand function and constant marginal costs, we then obtain conditions for the coopera-
tion within the fringe to be sustainable and focus on the most cooperative symmetric punishment
(MCSP) that sustains cooperation. We show that the MCSP is harsher when the number of ?rms
involved in the agreement is relatively large or when their relative cost disadvantage is relatively
small. However, both a larger number of ?rms and a larger cost disadvantage make it more di¢ cult
to sustain the cooperation.

Item Type: Monograph (Working Paper)
Language: English
Date: August 2012
Place of Publication: Toulouse
Uncontrolled Keywords: Repeated Game, Tacit Collusion, Optimal Punishments, Cost Asymmetry, Outsider
JEL Classification: C73 - Stochastic and Dynamic Games; Evolutionary Games; Repeated Games
D43 - Oligopoly and Other Forms of Market Imperfection
L13 - Oligopoly and Other Imperfect Markets
Divisions: TSE-R (Toulouse)
Institution: Université Toulouse 1 Capitole
Site: UT1
Date Deposited: 09 Jul 2014 17:34
Last Modified: 24 May 2018 09:29
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