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Optimal Collusion with Internal Contracting

  • Gea M. Lee

    (SMU)

In this paper, we develop a model of collusion in which two firms play an infinitelyrepeated Bertrand game when each firm has a privately-informed agent. The colluding firms, fixing prices, allocate market shares based on the agents information as to cost types. We emphasize that the presence of privately-informed agents may provide firms with a strategic opportunity to exploit an interaction between internal contracting and market-sharing arrangement : the contracts with agents may be used to induce firms truthful communication in their collusion, and collusive market-share allocation may act to reduce the agents information rents.

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Paper provided by East Asian Bureau of Economic Research in its series Development Economics Working Papers with number 22466.

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Date of creation: Jan 2008
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Handle: RePEc:eab:develo:22466
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