Center for Economic Research, Department of Economics, University of Minnesota
This paper describes a dynamic model of industry equilibrium
in which a cartel deters deviations from collusive output levels
by threatening to produce at Cournot quantities for a period of
fixed duration whenever the market price falls below some trigger
price. In this model firms can observe only their own production
level and a common market price. The market demand curve is assumed
to have a stochastic component, so that an unexpectedly low price
may signal either deviations from collusive output levels or a
"downward" demand shock.
This paper characterizes the optimality properties of this
model, from the standpoint of the firms which participate in the
cartel. In particular, the implications for the equilibrium quantity
vector, of setting the trigger price and punishment period length
at their optimal values, are assessed. It is demonstrated that, in
general, the optimal quantity will exceed that which would maximize
expected joint net returns in any single period. The optimal aggregate
quantity is shown to be a nondecreasing function of the number
of firms, equaling the aggregate Cournot level in the limit, and a
nondecreasing function of the variance of the stochastic demand component.
Porter, R.H., (1981), "Optimal Cartel Trigger Price Strategies", Discussion Paper No. 143, Center for Economic Research, Department of Economics, University of Minnesota.
Porter, Robert H..
Optimal Cartel Trigger Price Strategies.
Center for Economic Research, Department of Economics, University of Minnesota.
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