Wednesday, June 19, 2013
Posted by D. Daniel Sokol
Guillaume Cheikbossian (University of Montpellier, TSE) and Philippe Mahenc (University of Montpellier) analyze Cooperation in the Presence of an Advantaged Outsider.
ABSTRACT: This paper analyzes how the stability of the tacit cooperation within a fringe of several identical firms is affected by the presence of a more efficient firm which does not take part in their cooperative agreement. The model assumes that the firms of the fringe adopt ?stick and carrot strategies a la Abreu (1986, 1988) to support cooperation, while the outside firm 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 cooperation 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 firms involved in the agreement is relatively large or when their relative cost disadvantage is relatively small. However, both a larger number of firms and a larger cost disadvantage make it more difficult to sustain the cooperation.