Optimal Collusion with Internal Contracting

• Main Author: LEE, Gea Myoung
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2008
• Subjects: Price-fixing collusion; Private information; Internal contract; Information distortion; Econometrics
• Online Access: https://ink.library.smu.edu.sg/soe_research/1027; https://ink.library.smu.edu.sg/context/soe_research/article/2026/viewcontent/Optimal_Collusion_with_Internal_Contracting2009.pdf
• Institution: Singapore Management University

In this paper, we develop a model of collusion in which two firms play an infinitelyrepeated Bertrand game when each firm has a privately-informed agent. The colluding firms, fixing prices, allocate market shares based on the agent’s information as to cost types. We emphasize that the presence of privately-informed agents may provide firms with a strategic opportunity to exploit an interaction between internal contracting and market-sharing arrangement: the contracts with agents may be used to induce firms’ truthful communication in their collusion, and collusive market-share allocation may act to reduce the agents’ information rents.