The Determination of Price and Output Quotas in a Heterogeneous Cartel

Applying a selection criterion that uses both subgame perfection and the Nash bargaining solution, this paper investigates the relationship between firms' cost functions and collusive behavior. It is found that the optimal collusive price exceeds the price that the low-cost firm would set if it was a monopolist. Comparative statics reveal that the optimal collusive price is increasing in the low-cost-firm's unit cost, but is decreasing in the high-cost-firm's unit cost when the cost differential between firms is sufficiently large.