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Using relative profit incentives to prevent collusion

Abstract

This paper describes a new economic method for preventing oligopoly collusion. The method eliminates incentives for collusion by making managerial compensation depend on relative profits rather than absolute profits. This alteration of managerial incentives sets up a zero-sum game among the firms in an industry, yielding the result that firms no longer have incentive to collude, either actually or tacitly, with regard to prices or outputs. The method also ameliorates the imperfectly competitive outcomes which can result from even noncooperative oligopoly interactions.

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The author would like to thank numerous individuals for their comments on previous versions of this paper.

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Lundgren, C. Using relative profit incentives to prevent collusion. Rev Ind Organ 11, 533–550 (1996). https://doi.org/10.1007/BF00157777

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Key words

  • Oligopoly
  • collustion
  • relative profits
  • zero-sum game
  • managerial incentives