Journal of economic behavior & organization vol:33 issue:1 pages:121-136
In a repeated duopoly with heterogeneous firms I ask which enforceable collusive arrangement is likely to prevail. I propose the equilibrium at which both firms are just indifferent between colluding and defecting. For discount factors not exceeding a critical level, I show this equilibrium is Pareto-optimal, possibly even the unique Pareto-optimum. I then apply bargaining theory and show that the proposed equilibrium is the likely outcome of explicit negotiations. Finally, I argue that the proposed equilibrium is an obvious focal point on which firms may tacitly coordinate. The proposed equilibrium promises to be useful for comparative statics analysis of collusive oligopoly.