The profit-sharing rule that maximizes sustainability of cartel agreements

Abstract

We study the profit-sharing rule that maximizes the sustainability of cartel agreements when firms can make side-payments. This rule is such that the critical discount factor is the same for all firms ("balanced temptation"). If a cartel applies this rule, contrarily to the typical finding in the literature, asymmetries among firms may increase the sustainability of the cartel. In an illustrating example of a Cournot duopoly with asymmetric production costs, the sustainability of collusion is maximal when firms are extremely asymmetric.