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Inefficient Intra-Firm Incentives Can Stabilize Cartels in Cournot Oligopolies

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  • Kirstein, Roland
  • Kirstein, Annette

Abstract

The need for intra-firm incentive schemes allows remodeling the Cournot duopoly in wages (rather than in output levels). In both versions of the Cournot model, a cartel agreement is unstable. The new formulation, however, allows us to demonstrate that a collective wage agreement on minimum wages can stabilize the cartel solution. Beyond its relevance for strategic management, this result has a policy implication: competition authorities should observe collective wage agreements for their potential collusive effect on product markets. Moreover, the model may provide a new explanation why firms in reality pay lower than efficient variable wages and higher fixed wages than predicted by contract theory.

Suggested Citation

  • Kirstein, Roland & Kirstein, Annette, 2004. "Inefficient Intra-Firm Incentives Can Stabilize Cartels in Cournot Oligopolies," CSLE Discussion Paper Series 2004-09, Saarland University, CSLE - Center for the Study of Law and Economics.
  • Handle: RePEc:zbw:csledp:200409
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    References listed on IDEAS

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    Cited by:

    1. Jerger, Jürgen & Michaelis, Jochen, 2011. "The fixed wage puzzle: Why profit sharing is so hard to implement," Economics Letters, Elsevier, vol. 110(2), pages 104-106, February.
    2. Max Albert & Andreas Hildenbrand, 2016. "Industrial Organization and Experimental Economics: How to Learn from Laboratory Experiments," Homo Oeconomicus: Journal of Behavioral and Institutional Economics, Springer, vol. 33(1), pages 135-156, August.
    3. Bornstein, Gary & Kugler, Tamar & Budescu, David V. & Selten, Reinhard, 2008. "Repeated price competition between individuals and between teams," Journal of Economic Behavior & Organization, Elsevier, vol. 66(3-4), pages 808-821, June.

    More about this item

    Keywords

    Principal-agent theory; piece rate; fixed wage; collective wage agreements; Nash bargaining solution;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • J50 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - General
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory

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