# Asymmetric Collusion with Growing Demand

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## Abstract

We characterize collusion sustainability in markets where demand growth triggers the entry of a new firm whose efficiency may be different from the efficiency of the incumbents. We find that the profit-sharing rule that firms adopt to divide the cartel profit after entry is a key determinant of the incentives for collusion (before and after entry). In particular, if the incumbents and the entrant are very asymmetric, collusion without side-payments cannot be sustained. However, if firms divide joint profits through bargaining and are sufficiently patient, collusion is sustainable even if firms are very asymmetric.

## Keywords

Collusion Growing demand Nash bargaining Profit-sharing## JEL Classifications

K21 L11 L13## Notes

### Acknowledgments

We are grateful to Paul Belleflamme, Pedro Pita Barros, Joseph Harrington, and, specially, João Correia-da-Silva for their helpful comments. We also thank the Editor, Michael Peneder, and three anonymous referees for their useful suggestions. We acknowledge the financial support from Fundação para a Ciência e Tecnologia (PTDC/IIM-ECO/5294/2012). We thank the participants in the 39th EARIE Annual Conference in Rome, the 6th Meeting of the Portuguese Economic Journal in Porto, the 6th Economic Theory Workshop in Vigo, the 2012 UECE Lisbon Meeting on Game Theory and Applications and a seminar at U. Vigo. Joana Pinho acknowledges the support from Fundação para a Ciência e Tecnologia (BPD/79535/2011).

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