CARTEL STABILITY IN A DYNAMIC OLIGOPOLY WITH STICKY PRICES

We study the stability of cartels in a differential game model of oligopoly with sticky prices (Fershtman and Kamien 1987). We show that when firms use closed-loop strategies and the rate of increase of the marginal cost is .small enough., the grand coalition (i.e., when the cartel includes all firms) is stable: it is unprofitable for a .firm to exit the cartel. Moreover, a cartel of 3 firms is stable for any positive rate of increase of the marginal cost: it is not profitable for an insider firm to exit the coalition, nor it is profitable for an outsider firm to join the coalition. When firms use open-loop strategies the grand coalition is never stable; moreover, we show that only a cartel of size 2 can be stable and it is so only when the rate of increase of the marginal cost is large enough.