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Optimal collusion with internal contracting

By Gea M. Lee

Abstract

In this paper, two firms play an infinitely-repeated Bertrand game, and each firm has an agent who produces the firm's output and holds private information about production costs. The colluding firms fix prices and allocate market shares based on their agents' information. We develop a model of collusion in which firms use the presence of agents as a strategic opportunity to restrict their incentives to distort private information. We show that such firm behavior may expand the scope of optimal collusion whether market-allocation schemes are asymmetric or symmetric.Price-fixing collusion Private information Internal contract Information distortion

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