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Incentive Compatible Collusion and Investment

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  • Hongbin Cai

    ()
    (Department of Economics, UCLA)

  • Uday Rajan

    ()
    (Business School, University of Michigan)

Abstract

We consider a two-stage model in which two firms first invest in R&D to reduce their marginal production costs, and then either compete or collude in the output market. When they collude, they bargain over a cartel agreement to divide the collusive profit. If bargaining breaks down, they revert to duopolistic competition. For both a location model and a linear demand model, we show that firms invest more in R&D in the first stage under collusion than under competition. We demonstrate via example that social welfare may be greater under collusion than under competition in the location model.

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Bibliographic Info

Article provided by Society for AEF in its journal Annals of Economics and Finance.

Volume (Year): 6 (2005)
Issue (Month): 1 (May)
Pages: 37-52

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Handle: RePEc:cuf:journl:y:2005:v:6:i:1:p:37-52

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Related research

Keywords: Collusion; Competition; R&D investment;

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  1. Matusui, Akihiko, 1989. "Consumer-benefited cartels under strategic capital investment competition," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 7(4), pages 451-470, December.
  2. Schmalensee, Richard, 1987. "Competitive advantage and collusive optima," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 5(4), pages 351-367.
  3. FRIEDMAN, James W. & THISSE, Jacques-François, . "Partial collusion fosters minimum product differentiation," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -1070, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, Econometric Society, vol. 50(1), pages 97-109, January.
  5. Carl Davidson & Raymond Deneckere, 1984. "Excess Capacity and Collusion," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 675, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Joshua S. Gans & David H. Hsu & Scott Stern, 2000. "When Does Start-Up Innovation Spur the Gale of Creative Destruction?," NBER Working Papers 7851, National Bureau of Economic Research, Inc.
  7. Chaim Fershtman & Ariel Pakes, 1999. "A Dynamic Oligopoly with Collusion and Price Wars," NBER Working Papers 6936, National Bureau of Economic Research, Inc.
  8. David M. Kreps & Jose A. Scheinkman, 1983. "Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 14(2), pages 326-337, Autumn.
  9. Benoit, Jean-Pierre & Krishna, Vijay, 1987. "Dynamic Duopoly: Prices and Quantities," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 54(1), pages 23-35, January.
  10. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, Econometric Society, vol. 18(2), pages 155-162, April.
  11. Fershtman, Chaim & Gandal, Neil, 1994. "Disadvantageous semicollusion," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 12(2), pages 141-154, June.
  12. Joshua S. Cans & Scott Stern, 2000. "Incumbency and R&D Incentives: Licensing the Gale of Creative Destruction," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 9(4), pages 485-511, December.
  13. Suzumura, Kotaro, 1992. "Cooperative and Noncooperative R&D in an Oligopoly with Spillovers," American Economic Review, American Economic Association, American Economic Association, vol. 82(5), pages 1307-20, December.
  14. Osborne, Martin J & Pitchik, Carolyn, 1987. "Cartels, Profits and Excess Capacity," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(2), pages 413-28, June.
  15. Akihiko Matsui, 1987. "Consumer-Benefited Cartels Under Strategic Capital Investment Competition," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 798, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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