COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Post Office Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 668

"Profit-Sharing in a Collusive Industry"

Martin J. Osborne and Carolyn Pitchik

June 1983

We study a model in which collusive duopolists divide up the monopoly profit according to their relative bargaining power. We are particularly interested in how the negotiated profit shares depend on the sizes of the firms. If each can produce at the same constant unit cost up to its capacity, we show that the profit per unit of capacity of the small firm is higher than that of the large one. We also study how the ratio of the negotiated profits depends on the size of demand relative to industry capacity, and how this ratio changes with variations in demand.