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Strategic profit sharing between firms: a primer

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  • Waddle, Roberts

Abstract

This paper builds a theory of profit sharing between two firms in a duopoly market through which firms seek to increase their profits and, in turn, to limit the competition. We use a general model to show the direct (negative) and indirect (positive) effects of this strategy. We then focus on some oligopolistic models to analyze more deeply and more precisely these two opposite effects in search of the dominant one. We thus show that giving away profits is a rewarding strategy for firms in some (but not all) models of oligopolistic competition.

Suggested Citation

  • Waddle, Roberts, 2005. "Strategic profit sharing between firms: a primer," UC3M Working papers. Economics we050801, Universidad Carlos III de Madrid. Departamento de Economía.
    • Handle: RePEc:cte:werepe:we050801
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    References listed on IDEAS

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    1. Vives, Xavier, 1984. "Duopoly information equilibrium: Cournot and bertrand," Journal of Economic Theory, Elsevier, vol. 34(1), pages 71-94, October.
    2. Vives, Xavier, 1990. "Information and competitive advantage," International Journal of Industrial Organization, Elsevier, vol. 8(1), pages 17-35.
    3. Stephen W. Salant & Sheldon Switzer & Robert J. Reynolds, 1983. "Losses From Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 98(2), pages 185-199.
    4. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
    5. Maskin, Eric & Tirole, Jean, 1988. "A Theory of Dynamic Oligopoly, II: Price Competition, Kinked Demand Curves, and Edgeworth Cycles," Econometrica, Econometric Society, vol. 56(3), pages 571-599, May.
    6. Maskin, Eric & Tirole, Jean, 1988. "A Theory of Dynamic Oligopoly, I: Overview and Quantity Competition with Large Fixed Costs," Econometrica, Econometric Society, vol. 56(3), pages 549-569, May.
    7. Varian, Hal R, 1994. "A Solution to the Problem of Externalities When Agents Are Well-Informed," American Economic Review, American Economic Association, vol. 84(5), pages 1278-1293, December.
    8. William A. Brock & José A. Scheinkman, 1985. "Price Setting Supergames with Capacity Constraints," Review of Economic Studies, Oxford University Press, vol. 52(3), pages 371-382.
    9. S. Baranzoni & P. Bianchi & L. Lambertini, 2000. "Multiproduct Firms, Product Differentiation, and Market Structure," Working Papers 368, Dipartimento Scienze Economiche, Universita' di Bologna.
    10. Oz Shy, 1996. "Industrial Organization: Theory and Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262691795, March.
    11. Jun, Byoung & Vives, Xavier, 2004. "Strategic incentives in dynamic duopoly," Journal of Economic Theory, Elsevier, vol. 116(2), pages 249-281, June.
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    Cited by:

    1. José Luis Ferreira & Roberts Waddle, 2010. "Strategic profit sharing between firms," International Journal of Economic Theory, The International Society for Economic Theory, vol. 6(4), pages 341-354.

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