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Theoretical and Applied Economics
No. 1 / 2014 (590)

Stochastic evolutionary cartel formation

Darong DAI
Nanjing University, Nanjing
Kunrong SHEN
Nanjing University, Nanjing

Abstract. This paper employs the evolutionary dynamics driven by the Moran process (a special birth-death process) to investigate endogenous cartel formation from the perspective of stochastic evolution of the underlying industry. A Prisoner’s Dilemma game is derived based on the Cournot competition between any two firms. Moreover, in a repeated setting, we consider the normal-form game between two well-known behavior modes: cooperative strategy tit-for-tat (TFT) and non- cooperative strategy always defect (ALLD). We then give the corresponding conditions under which full collusion and partial collusion are established, respectively, in stochastic evolutionary sense. Finally, both the threshold of discount factor and the threshold of industry concentration are endogenously determined in the model.

Keywords: Endogenous cartel, Cournot competition, Prisoner’s Dilemma, Repeated game, Evolutionary game theory.

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