Inefficient Intra-Firm Incentives Can Stabilize Cartels in Cournot Oligopolies.

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German Working Papers in Law and Economics

AUTHOR:
Roland Kirstein and Annette Kirstein

TITLE:
Inefficient Intra-Firm Incentives Can Stabilize Cartels in Cournot Oligopolies.

SUGGESTED CITATION:
Roland Kirstein and Annette Kirstein (2005) "Inefficient Intra-Firm Incentives Can Stabilize Cartels in Cournot Oligopolies.", German Working Papers in Law and Economics: Vol. 2005: Article 14.
http://www.bepress.com/gwp/default/vol2005/iss1/art14

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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.