Solving

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Osborne’s Cartel Maintaining Rule Revisited ⋆

We present a proportional reaction strategy in a repeated Cournot duopoly game with discounting. The strategy is based on increasing the total output quantity in proportion to deviations from a cartel point. Such a strategy was originally proposed by Osborne (1976) for a static oligopoly. We show that the resulting equilibrium is subgame perfect and weakly renegotiation proof when the possible deviations are bounded and the proportional reactions have sufficiently large slopes. The lower bounds for the slopes depend on the profit functions and discount factors in a simple way. A strategic explanation for conjectural variations equilibrium is discussed as well. Key words: proportional strategy, conjectures, subgame perfection