Delegation and firms’ ability to collude

Abstract

In a model of repeated Cournot competition under complete information, we show that delegation has no e®ect on cartel stability if managers collude, while it may hinder cartel stability when owners collude in setting the incentive schemes. If owners can choose whether to delegate or keep control of their respective¯rms, and both groups of individuals collude or play noncooperatively in their respective variables according to the level of intertemporal discount factor, then if managers are not able to collude in output levels, owners' delegation decision is non-monotone in the discount factor.

Should One Sell Domestic Firms to Foreign Ones? A Tale of Delegation, Acquisition and Collusion

“…Lambertini and Trombetta (2002) show that the stability of a cartel is also a¤ected by strategic delegation. In a Cournot oligopoly, strategic delegation implies that owners delegate output decisions to managers whose objective functions di¤er from the owners'.…”

“…Yet, when owners collude between them to maximize joint pro…ts, the optimal amount of delegation is negative (Lambertini and Trombetta, 2002). Clearly, this is a conceivable outcome, but the empirical evidence points in the opposite direction, suggesting that managers do not place a negative weight on sales (Murphy, 1995, Baker et al, 1988.…”

“…In equilibrium output is larger and prices are lower as compared to the Cournot Nash equilibrium, thereby reducing pro…ts and increasing consumer surplus (Fershtman, 1985, Vickers, 1985. Considering a repeated Cournot oligopoly between two …rms, Lambertini and Trombetta (2002) show that delegation can make the cartel more unstable when owners collude in setting the incentives schemes, because it makes deviation from the cartel more appealing compared to a situation where …rms are strict pro…t-seeking agents.…”

“…Konishi and Lin (1999) and Sha¤er (1995) consider an oligopoly where fringe …rms make output decisions after the cartel has chosen its output level. In this paper, I adopt the same model as Vickers (1985) and Lambertini and Trombetta (2002), in which all output choices are taken simultaneously, and I extend the idea that delegation is a relevant strategic variable for cartel stability by considering how a cartel between owners of pure pro…t-seeking …rms that maximize joint pro…ts is a¤ected by a fringe of managerial …rms. I show that it is always possible to make the cartel between owners unstable by appropriately selecting the dimension of the fringe, and that such a dimension is non-monotone in the total number of …rms operating in the market.…”

“…< 0: If the owners adopt symmetric incentive schemes, the optimal solution is i = (n 1)(a c) 2n that, for the case n = 2 simpli…es to i = (a c) (see Lambertini and Trombetta, 2002), where C and D are, respectively, the pro…ts accruing to the owner of the domestic …rm in the collusive and in the delegating equilibrium with no entry. The zero appearing in brackets signals this is the case where m = 0:…”