Friday, September 30, 2022

Strategic Delegation and Collusion: An Experiment

Strategic Delegation and Collusion: An Experiment

Jeong Yeol Kim

University of Arizona


The assumption that firms maximize profit has been widely used in economics to explain firm behavior and market outcomes. But the profit maximization assumption may lead to incorrect predictions when firms engage in strategic delegation between owners (e.g. shareholders) and managers (e.g. executives) whose incentives might differ. This research examines firms' collusion under the assumption that firms engage in strategic delegation, compared to that under profit maximization. The experiment incorporates cartel fines for firms' managers as well as owners to more closely align with the US antitrust regime. The experiment yields three main findings: (1) the market is more competitive under strategic delegation than under profit maximization, though this does not guarantee fewer cartels will exist in a market; (2) cartel formation occurs in two distinct ways, firms simultaneously choose a low output for collusion or they periodically switch off high and low outputs to evade cartel fines; (3) cartels are more likely to be formed when each firm has different incentives for managers compared to when their incentives are the same.

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