Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 2006:21: Bargaining in Collusive Markets

Ola Andersson ()
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Ola Andersson: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden

Abstract: In this paper we investigate collusion in an infinitely repeated Bertrand duopoly where firms have different discount factors. In order to study how a collusive agreement is reached we model the equilibrium selection as an alternating-offer bargaining game. The selected equilibrium has several appealing features: First, it is efficient in the sense that it entails immediate agreement on the monopoly price. Second, the equilibrium shows how discount factors affect equilibrium market shares. A comparative statics analysis on equilibrium market shares reveals that changes in discount factors may have ambiguous effects on market shares.

Keywords: Bargaining; different discount factors; explicit collusion; market shares

JEL-codes: C72; D43; L11; L41

21 pages, November 14, 2006

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