Dynamically stable dormant firm cartel

Abstract

In this chapter, the optimization by cartels that restricts outputs to enhance their joint profit is examined. In particular, we consider oligopolies in which firms agree to form a cartel to restrain output and enhance their profits. Some firms have cost disadvantages that force them to become dormant partners. In Sect. 7.1 a dynamic oligopoly in which there are cost differentials among firms is presented. Pareto optimal output path, imputation schemes, profit sharing arrangements, and time (optimal-trajectory-subgame) consistent solution are derived for a dormant firm cartel in Sect. 7.2. An illustration is shown in the following section. The case when the planning horizon becomes infinite is analyzed in Sect. 7.4, including an illustration with an explicit solution following in the subsequent section.