Bargaining over collusion: the threat of supply function versus Cournot competition under demand uncertainty and cost as
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Bargaining over collusion: the threat of supply function versus Cournot competition under demand uncertainty and cost asymmetry Ismail Saglam1 Received: 16 April 2018 / Revised: 7 March 2019 / Accepted: 25 July 2019 / Published online: 6 December 2019 © Japanese Economic Association 2020
Abstract In this paper, we study bargaining over collusion profits in a duopolistic industry with cost asymmetry and demand uncertainty. We consider disagreement payoffs obtained from the non-cooperative equilibrium of either the quantity competition or the supply function competition, and bargaining solutions splitting the gains from agreement either equally or proportionally. We find that each duopolist has always incentive to join a collusive agreement, and the more efficient firm (the less efficient firm) in the cartel always obtains a higher agreement payoff when the disagreement payoff is obtained from the equilibrium of supply function competition (quantity competition). Keywords Duopoly · Collusion · Bargaining · Cournot competition · Supply function competition · Uncertainty JEL Classification D43 · L13
1 Introduction A voluminous literature has extensively studied the basic problem of oligopolistic cartels as to how to divide collusion profits under cost asymmetries. While a strand of this literature followed Patinkin’s (Patinkin 1947) efficiency concern that the cartel should allocate the collusive outcome to equalize the marginal costs of oligopolists, another strand accepted Bain’s (Bain 1948) criticism that the division of collusion profits must respect the relative bargaining power of the oligopolists obtained from the threat of playing their non-cooperative equilibrium strategies [see, for example, Osborne and Pitchik (1983) and Schmalansee (1987)]. However, * Ismail Saglam [email protected] 1
Department of Economics, TOBB University of Economics and Technology, Sogutozu Cad. No. 43, Sogutozu, 06560 Ankara, Turkey
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The Japanese Economic Review (2020) 71:671–693
studies in both strands of the literature have mainly focused on the types of collusion where the oligopolistic firms compete in prices or in quantities. What these studies were generally missing is the possibility of collusion in supply functions under the threat of supply function competition [introduced by Grossman (1981) and developed by Klemperer and Meyer (1989)]. This is despite the fact that the supply function competition has found a wide application in the last 2 decades in liberalized power (electricity) industries, where this type of competition is believed to model the strategic game played by power generators more adequately than the quantity and price competitions (see, for example, Green and Newbery 1992; and Rudkevich and Duckworth 1998). The popularity of the supply function competition has also social grounds. When industries face a sufficiently high variability in demand, the welfares of both consumers and oligopolistic producers can be higher under the supply function competition than under the quantit
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