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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. 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.
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  3. THISSE, Jacques-François & VIVES, Xavier, . "Basing point pricing: Competition versus collusion," CORE Discussion Papers RP 1003, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
  5. Osborne, Martin J. & Pitchik, Carolyn, 1983. "Cartels, Profits, and Excess Capacity," Working Papers 83-09, C.V. Starr Center for Applied Economics, New York University.
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  7. Ariel Rubinstein, 2010. "Perfect Equilibrium in a Bargaining Model," Levine's Working Paper Archive 661465000000000387, David K. Levine.
  8. Fershtman, Chaim & Gandal, Neil, 1994. "Disadvantageous semicollusion," International Journal of Industrial Organization, Elsevier, vol. 12(2), pages 141-154, June.
  9. Matusui, Akihiko, 1989. "Consumer-benefited cartels under strategic capital investment competition," International Journal of Industrial Organization, Elsevier, vol. 7(4), pages 451-470, December.
  10. Davidson, Carl & Deneckere, Raymond J, 1990. "Excess Capacity and Collusion," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(3), pages 521-41, August.
  11. 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.
  12. 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.
  13. 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.
  14. Jean-Pierre Benoit & Vijay Krishna, 1987. "Dynamic Duopoly: Prices and Quantities," Review of Economic Studies, Oxford University Press, vol. 54(1), pages 23-35.
  15. 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.
  16. Schmalensee, Richard, 1987. "Competitive advantage and collusive optima," International Journal of Industrial Organization, Elsevier, vol. 5(4), pages 351-367.
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