A Constructive Proof Of Existence And A Characterization Of The Farsighted Stable Set In A Price-Leadership Cartel Model Under The Optimal Pricing

Diamantoudi (2005, Economic Theory) has proved the existence of the (unique) stable set of cartels in a price-leadership cartel model, in which firms are assumed to be farsighted and the dominant cartel adopts the optimal pricing policy. In this paper, the authors give an alternative, elementary proof based on a constructive algorithm. With this, they can fully characterize the stable set of cartels: it contains at least one Pareto-efficient cartel and, in particular, the largest stable cartel in it is Pareto-efficient. By using a simple example, they also show that there can be some stable, but not Pareto-efficient cartels and some Pareto-efficient, but not stable cartels.