Keeping up with the Joneses: competition and the evolution of collusion

An economy consists of many markets, each of which is a duopoly. Firms must earn normal-profits in the long-run if they have to survive. Normal-profits are interpreted as the long-run limit of average profits in the whole economy. We adopt an aspiration based model of firm behaviour, linking it to the economy with the requirement that in the long-run, the profit aspiration must be at least as great as normal-profits. We assume that the joint-profits can be maximized with symmetric payoffs, and with very few other assumptions are able to show that the (almost) global attractor is the cooperative outcome. (C) 2000 Elsevier Science B.V. All rights reserved.