The Theory of Collusion Under Financial Constraints

22 Pages Posted: 9 Aug 2006

See all articles by Yosuke Yasuda

Yosuke Yasuda

Osaka University - Graduate School of Economics

Date Written: September 14, 2007

Abstract

This paper analyzes how financial constraints affect equilibrium payoffs and behaviors in repeated Cournot games. Modifying minmax and feasible payoffs, we derive the folk theorem under financial constraints. Our theorem illustrates that introducing financial constraints shrinks the set of equilibrium payoffs in favor of a firm that has a larger financial budget. We also show that financial constraints can substantially restrict possible equilibrium behaviors. For instance, collusion in which firms equally divide a monopoly profit in each period, which is often assumed in applications in industrial organization, may not be sustained in any equilibrium. Furthermore, playing the Cournot equilibrium in each period need not be an equilibrium, either.

Keywords: collusion, financial constraint, folk theorem, repeated game

JEL Classification: C72, C73, D43, G33, L13

Suggested Citation

Yasuda, Yosuke, The Theory of Collusion Under Financial Constraints (September 14, 2007). Available at SSRN: https://ssrn.com/abstract=922902 or http://dx.doi.org/10.2139/ssrn.922902

Yosuke Yasuda (Contact Author)

Osaka University - Graduate School of Economics ( email )

1-7 Machikaneyama
Toyonaka, Osaka, 560-0043
Japan

Register to save articles to
your library

Register

Paper statistics

Downloads
1,437
Abstract Views
6,310
rank
12,542
PlumX Metrics