The Tragedy of the Common Holdings: Coordinated Manager Compensation and Price Competition

Werner Neus and Manfred Stadler

Journal of Institutional and Theoretical Economics (JITE), 2023, vol. 179, issue 2, 271-287

Abstract: We study price competition in a heterogeneous triopoly market where two firms are commonly owned by the same institutional shareholders, whereas the third firm is owned by independent shareholders.With such a mixed ownership structure the common owners have an incentive to coordinate their firms' behavior. In contrast to direct coordination of price decisions, delegation to managers enables indirect coordination via the designs of the manager compensation contracts. Compared to direct owner collusion, this more sophisticated type of indirect coordination leads to even higher firm profits and to an even higher loss of social welfare: the tragedy of common holdings.

Keywords: price competition; manager compensation; common holdings; shareholder coordination (search for similar items in EconPapers)
JEL-codes: G32 L22 M52 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1628/jite-2023-0027

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