Incentive Compatible Collusion and Investment

Hongbin Cai () and Uday Rajan ()
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Uday Rajan: Business School, University of Michigan

Annals of Economics and Finance, 2005, vol. 6, issue 1, 37-52

Abstract: We consider a two-stage model in which two firms first invest in R&D to reduce their marginal production costs, and then either compete or collude in the output market. When they collude, they bargain over a cartel agreement to divide the collusive profit. If bargaining breaks down, they revert to duopolistic competition. For both a location model and a linear demand model, we show that firms invest more in R&D in the first stage under collusion than under competition. We demonstrate via example that social welfare may be greater under collusion than under competition in the location model.

Keywords: Collusion; Competition; R&D investment (search for similar items in EconPapers)
JEL-codes: L11 L13 O31 (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:cuf:journl:y:2005:v:6:i:1:p:37-52

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