A Computational Algorithm for Optimal Collusion in Dynamic Cournot Oligopoly

Abstract

Recent work in oligopoly theory has focused on the optimal degree of tacit collusion sustainable in a dynamic oligopoly. Such analysis for price-setting oligopoly has advanced substantially; however, analysis of Cournot oligopoly has not proceeded apace. this paper analyzes best and worst strongly symmetric equilibria for dynamic quantity-setting oligopoly with demand dynamics, such as business cycles, that are independent of previous quantity choices. Two primary results are obtained. First, the paper shows through construction that best and worst strongly symmetric equilibria exist, and that the worst equilibria may be constructed, as in Abreu (1983, 1986), so that they prescribe optimal equilibrium play from periods 2 onward. That is, they have a stick-and-carrot structure. Second, it provides a simple algorithm for the computation of the extremal equilibria.