Upward-sloping labor supply, firing costs and collusion

Abstract

We analyze the sustainability of collusion in a supergames framework wherein the only input is a highly qualified type of labor, with its supply being upward-sloping and the wage being sensitive to the industry input demand. Hence, when seeking to expand production, firms have to attract additional employees by offering them higher wages. We compare equilibria and social welfare in both quantity and price competitions, as well as by considering non-negligible firing costs. We prove that: the sensitivity of wages to the industry demand for labor facilitates collusion in price competition (in quantity competition, the reverse is true); in both price and quantity competitions, collusion should be welfareenhancing when the sensitivity of wage is high enough. Moreover, the introduction of firing costs, decreasing the incentive to cut the production after a temporary rise, reduces the deviation profits making collusion easier to sustain. Our results can be extended to any context where input prices are endogenous