The profit-sharing rule that maximizes sustainability of cartel agreements

Posted by D. Daniel Sokol

Joao Correia-da-Silva (CEF.UP and Faculdade de Economia, Universidade do Porto) and Joana Pinho (FCT and RGEA, Universidad de Vigo) describe The profit-sharing rule that maximizes sustainability of cartel agreements.

ABSTRACT: We propose a profit-sharing rule that maximizes sustainability of cartel agreements. This rule is such that the critical discount factor is the same for all the firms. If a cartel applies this rule, then asymmetries among firms may not hinder collusion (contrarily to the typical finding in the literature). In the simplest case of a Cournot duopoly in which firms differ in their stocks of capital, we find that the cartel is the least sustainable when one of the firms is approximately two times bigger than the other.