Optimal Collusion and Dynamic Perfect Competition
by
Harrison Cheng
Department of Economics, University of Southern California

Dynamic Cournot Competition allows collusive equilibrium in repeated Cournot games.

We develop a theory of dynamic perfect competition with the breakdown of collusion due to insufficient penalties. When there is constant cost of production, we show that the output per firm will converge to the competitive output, the market price converges to the lowest cost of production, and the profit per firm will converge to 0 in any sequence of dynamic perfect equilibrium. When the cost function is convex, we offer a simple Dynamic Cournot Competition allows collusive equilibrium in repeated Cournot games. We develop a theory of dynamic perfect competition with the breakdown of collusion due to insufficient penalties. When there is constant cost of production, we show that the output per firm will converge to the competitive output, the market price converges to the lowest cost of production, and the profit per firm will converge to 0 in any sequence of dynamic perfect equilibrium. When the cost function is convex, we offer a simple bound for the size of the collusion profit, based on the size of credible penalties.

Date received: May 4, 2000

Copyright © 2000 by the author(s). The author(s) of this document and the organizers of the conference have granted their consent to include this abstract in Atlas Mathematical Conference Abstracts. Document # cafc-07.