Bargaining Over Collusion: the Threat of Supply Function Versus Cournot Competition Under Demand Uncertainty and Cost Asymmetry

Abstract

In this paper, we study bargaining over collusion profits in a duopolistic industry with cost asymmetry and demand uncertainty. We consider disagreement payoffs obtained from the non-cooperative equilibrium of either the quantity competition or the supply function competition, and bargaining solutions splitting the gains from agreement either equally or proportionally. We find that each duopolist has always incentive to join a collusive agreement, and the more efficient firm (the less efficient firm) in the cartel always obtains a higher agreement payoff when the disagreement payoff is obtained from the equilibrium of supply function competition (quantity competition).