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Incentive Compatible Collusion and Investment

  • Hongbin Cai

    ()

    (Department of Economics, UCLA)

  • Uday Rajan

    ()

    (Business School, University of Michigan)

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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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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  1. Carl Davidson & Raymond Deneckere, 1984. "Excess Capacity and Collusion," Discussion Papers 675, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Chaim Fershtman & Ariel Pakes, 2000. "A Dynamic Oligopoly with Collusion and Price Wars," RAND Journal of Economics, The RAND Corporation, vol. 31(2), pages 207-236, Summer.
  3. Thisse, J-F. & Vives, X., 1990. "Basing Point Pricing: Competition Versus Collusion," UFAE and IAE Working Papers 136-90, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  4. Ariel Rubinstein, 2010. "Perfect Equilibrium in a Bargaining Model," Levine's Working Paper Archive 252, David K. Levine.
  5. 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, vol. 28(2), pages 413-28, June.
  6. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
  7. Fershtman, C. & Gandal, N., 1991. "Disadvantageous Semicollusion," Papers 37-91, Tel Aviv.
  8. Benoit, Jean-Pierre & Krishna, Vijay, 1987. "Dynamic Duopoly: Prices and Quantities," Review of Economic Studies, Wiley Blackwell, vol. 54(1), pages 23-35, January.
  9. Suzumura, Kotaro, 1992. "Cooperative and Noncooperative R&D in an Oligopoly with Spillovers," American Economic Review, American Economic Association, vol. 82(5), pages 1307-20, December.
  10. Schmalensee, Richard, 1987. "Competitive advantage and collusive optima," International Journal of Industrial Organization, Elsevier, vol. 5(4), pages 351-367.
  11. Matusui, Akihiko, 1989. "Consumer-benefited cartels under strategic capital investment competition," International Journal of Industrial Organization, Elsevier, vol. 7(4), pages 451-470, December.
  12. James W. Friedman & Jacques-Francois Thisse, 1993. "Partial Collusion Fosters Minimum Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 24(4), pages 631-645, Winter.
  13. Joshua S. Cans & Scott Stern, 2000. "Incumbency and R&D Incentives: Licensing the Gale of Creative Destruction," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(4), pages 485-511, December.
  14. 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.
  15. David M. Kreps & Jose A. Scheinkman, 1983. "Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 326-337, Autumn.
  16. Akihiko Matsui, 1987. "Consumer-Benefited Cartels Under Strategic Capital Investment Competition," Discussion Papers 798, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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