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Optimal Collusion with Internal Contracting

  • Gea Myoung Lee

    ()

    (School of Economics, Singapore Management University)

In this paper, we develop a model of collusion in which two firms play an infinitely repeated Bertrand game when each firm has a privately-informed agent. The colluding firms, fixing prices, allocate market shares based on the agent’s 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 Singapore Management University, School of Economics in its series Working Papers with number 08-2008.

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Length: 46 pages
Date of creation: Feb 2008
Date of revision:
Publication status: Published in SMU Economics and Statistics Working Paper Series
Handle: RePEc:siu:wpaper:08-2008
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