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Inefficient Intra-Firm Incentives Can Stabilize Cartels in Cournot Oligopolies

Roland Kirstein and Annette Kirstein

No 2004-09, CSLE Discussion Paper Series from Saarland University, CSLE - Center for the Study of Law and Economics

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.

Keywords: Principal-agent theory; piece rate; fixed wage; collective wage agreements; Nash bargaining solution (search for similar items in EconPapers)
JEL-codes: C72 J50 L41 J33 K31 D43 C78 (search for similar items in EconPapers)
Date: 2004
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Working Paper: Inefficient Intra-Firm Incentives Can Stabilize Cartels in Cournot Oligopolies (2007) Downloads
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