Colluding with a conscience

Abstract

Other-regarding preferences have been documented in many strategic settings. We provide a model in which the managers of firms in an oligopoly have preferences for both consumer welfare and own income. We find that profit sharing can function as a facilitating practice. Managers must receive a sufficiently large share of profits for collusion to be sustained, and the optimal collusive price increases with the degree of profit sharing. Thus, restrictions on performance-based compensation may be consistent with the objectives of antitrust policy. We also find that an increase in industry concentration can harm consumers even if the firms were already successfully colluding.