Punishment Paths and Cartel Size

Abstract

Using a Dominant-group-fringe model, we show that the choice of punishment path in the event that unilateral defection occurs depends upon the common discount parameter, and that when the discount parameter is given the punishment path may depend upon the size of the dominant- group. A striking result is that only for sufficiently small dominant groups in sufficiently small industries are there cases where costs affect these choices. Consequently, costs are irrelevant to the choice of punishment in industries with a large number of …firms.

Keywords: Dominant-group cartels; repeated games; punishment paths.

JEL Classification: D43