Abstract
We study a model that integrates organizational structure and agency withdynamic price competition in oligopoly. Workers in different levels of the organizational structure have asymmetric information and heterogeneous objectives; i.e., there are agency conflicts within the firm. The organizational strategy of the firm is to determinesequentially the decision power relating to price and non-price competition instruments at each level. We examine the equilibrium organizational and competitive strategy of firms in a duopoly, and characterize the extent of noncooperative tacit collusion (with respect to price and non-price competition) that is feasible. We identify two sets of sufficient conditions that guarantee, (i) the monopoly solution is sustainable at any discount factor (rate of impatience of the workers), or (ii) the monopoly solution is not sustainable for any level of the discount factor. Interestingly, tacit collusion may be feasible when either the agency problem is non-existentor very severe; i.e., firm profits in equilibrium may be non-monotone in the extent of the agency conflict. Our analysis indicates that intrafirm learning and agency will have a stronger impact on feasible tacit collusion in markets where non-price competition plays a strong role. Moreover, there is an intimate connection between the firm's organizational strategy and the extent of tacit collusion with the (industry) business cycle.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Explore related subjects
Discover the latest articles, news and stories from top researchers in related subjects.References
Abreu, D., (1988), “On the Theory of Infinitely Repeated Games with Discounting,”Econometrica 56, 383–396.
Abreu, D., D. Pearce and E. Stacchetti, (1986), “Optimal Cartel Equilibria with Imperfect Monitoring,”Journal of Economic Theory, 39, 251–269.
Basu, A., R. Lal, V. Srinivasan, and R. Staelin, (1985), “Sales Compensation Plans: An Agency Theoretic Perspective,”Marketing Science, 4, 267–291.
Bertrand, J., (1883), “Theorie Mathematique de la Richesse Sociale”Journal des Savants, 499–508.
Bowley, A., (1924),Mathematical Foundations of Economics, New York: Oxford University Press.
Carley, K. (1992), “Organizational Learning and Personnel Turnover,”Organizational Science, 3, 20–46.
Cohen, M., J. March, and J. Olsen (1972), “A Garbage Can Model of Organizational Choice,”Administrative Science Quarterly, 17, 1–25.
Cournot, A.A., (1838),Researches into the Mathematical Principles of the Theory of Wealth, New York: Kelley.
Cron, W. and G. Frazier, (1979), “Delegating Pricing Authority to the Salesforce: The Effects on Sales and Profit Performance,”Journal of Marketing, 43, 21–28.
Cyert, R., and M. DeGroot, (1970), “Multiperiod Decision Models with Alternating Choice as the Solution of the Duopoly Problem,”Quarterly Journal of Economics, 84, 419–429.
Cyert, R. and M. DeGroot, (1971), “Interfirm Learning and the Kinked Demand Curve,”Journal of Economic Theory, 3, 272–287.
Cyert, R., P. Kumar, and J. Williams, (1995), “Impact of Organizational Structure on Oligopolistic Pricing,”Journal of Economic Behavior and Organization, 26, 1–15.
Fershtman, C. and K. Judd, (1987), “Equilibrium Incentives in Oligopoly,”American Economic Review, 77, 927–940.
Fudenberg, D. and D. Levine, (1993), “Steady State Learning and the Nash Equilibrium,”Econometrica, 61, 547–574.
Fudenberg, D. and J. Tirole, (1991),Game Theory, Cambridge: MIT Press.
Galbraith, J. (1977),Organizational Design, Reading, MA: Addison-Wesley.
Green, E. and R. Porter, (1984), “Noncooperative Collusion under Imperfect Price Information,”Econometrica, 52, 87–100.
Friedman, J., (1971), “A Noncooperative Equilibrium for Supergames,”Review of Economic Studies, 38, 1–12.
Holmstrom, B. and J. Tirole, (1989), “The Theory of the Firm,” in R. Schamelensee and D. Willig (ed.)Handbook of Industrial Organization: Volume I, Amsterdam: North-Holland.
Katz, M., (1991), “Game-playing Agents: Unobservable Contracts as Precommitments,”Rand Journal of Economics, 22, 307–328.
Lal, R., (1986), “Delegating Pricing Responsibility to the Salesforce,”Marketing Science, 5, 159–168.
Lant, T. and S. Mezias (1992), “An Organizational Learning Model of Convergence and Reorientation,”Organization Science, 3, 47–71.
March, J. (1991), “Exploration and Exploitation in Organizational Learning,”Organization Science, 2, 71–87.
March, J. and H. Simon (1993),Organizations (Second Edition), Cambridge, MA: Blackwell.
Maskin, E. and J. Tirole, (1988a), “A Theory of Dynamic Oligopoly, I: Overview and Quantity Competition with Large Fixed Costs,”Econometrica, 56, 549–570.
Maskin, E. and J. Tirole, (1988b), “A Theory of Dynamic Oligopoly, II: Price Competition, Kinked Demand Curves, and Edgeworth Cycles,”Econometrica, 56, 571–600.
Masuch, M. and P. LaPotin (1989), “Beyond Garbage Can: An AI Model of Organizational Choice,”Administrative Science Quarterly, 34, 38–67.
Radner, R., R. Myerson, E. Maskin, (1986), “An Example of Repeated Partnership Game with Discounting and Uniformly Inefficient Equilibria,”Review of Economic Studies, 53, 59–70.
Scitovsky, T., (1991), “The Benefits of Asymmetric Markets,”Journal of Economic Perspectives, 4, 135–148.
Scott, R. (1987),Organizations: Rational, Natural, and Open Systems (Second Edition), Englewood Cliffs, NJ: Prentice-Hall.
Shapiro, C., (1989), “Theories of Oligopoly Behavior,” in Schmalensee, R. and R. Willig (ed.),Handbook of Industrial Organization: Volume I, Amsterdam: North-Holland.
Spence, M., (1973), “Job Market Signalling,”Quarterly Journal of Economics, 87, 355–379.
Thompson, J. (1967),Organizations in Action, New York: McGraw-Hill.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Cyert, R.M., Kumar, P. Organizational strategy and tacit collusion in oligopoly with agency. Comput Math Organiz Theor 1, 9–38 (1995). https://doi.org/10.1007/BF01307826
Issue Date:
DOI: https://doi.org/10.1007/BF01307826