Common Marketing Agency as a Device for Facilitating Collusion

B. Douglas Bernheim and Michael Whinston

RAND Journal of Economics, 1985, vol. 16, issue 2, 269-281

Abstract: In a variety of markets firms voluntarily and independently delegate control over certain aspects of marketing to common agents. In this article we present an explicit model of agency delegation where firms noncooperatively select agents, name output prices, and choose compensation schemes. We exhibit an equilibrium in which all strategic variables -- not merely the marketing choices delegated to agents, but prices as well -- are selected perfectly cooperatively. This cooperative equilibrium is very simple and attractive: each firm sets the collusive output price, and employs a commission scheme to compensate the agent. Although each firm has the ability to condition compensation on the agent's action (as well as on sales), firms choose to forego this opportunity. In essence, common agency provides an indirect mechanism through which competing firms may "sell out" to a single party, thereby creating incentives which generate a collusive outcome.

Date: 1985
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