Inefficient Intra-Firm Incentives Can Stabilize Cartels in Cournot Oligopolies

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Inefficient Intra-Firm Incentives Can Stabilize Cartels in Cournot Oligopolies

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Roland Kirstein () (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)
Annette Kirstein

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Roland Kirstein

Abstract

The instability of Cournot cartels can be overcome by a collective wage agreement if this agreement stipulates minimum fixed wages and piece rates that are legally enforceable. This new view on the institution of collective wage agreements is not only relevant for strategic management, it also has an important implication for economic policy: competition authorities should observe such agreements for their potentially collusive effect on product markets. Moreover, the model contributes to the explanation of the “fixed wage puzzle”, i.e., the observation that firms pay lower than efficient variable wages and higher fixed wages than predicted by contract theory.

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Paper provided by Otto-von-Guericke University Magdeburg, Faculty of Economics and Management in its series FEMM Working Papers with number 07004.

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Length: 16 pages
Date of creation: Feb 2007
Date of revision:
Handle: RePEc:mag:wpaper:07004

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Find related papers by JEL classification:
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
J50 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - General
K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law
L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

This paper has been announced in the following NEP Reports:

NEP-ALL-2007-05-12 (All new papers)
NEP-BEC-2007-05-12 (Business Economics)
NEP-COM-2007-05-12 (Industrial Competition)
NEP-LAB-2007-05-12 (Labour Economics)

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Other versions:
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Benjamin E. Hermalin, 1992. "The Effects of Competition on Executive Behavior," RAND Journal of Economics, The RAND Corporation, vol. 23(3), pages 350-365, Autumn. [Downloadable!] (restricted)
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Schmidt, Klaus M, 1997. "Managerial Incentives and Product Market Competition," Review of Economic Studies, Blackwell Publishing, vol. 64(2), pages 191-213, April. [Downloadable!] (restricted)
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