Essays on strategic and contractual relationships in oligopoly

The thesis consists of three essays. In the first essay, the strategic effects of bonus/penalty compensation contracts are analysed. This essay consists of the first three chapters of the thesis. In Chapter 1, viewing each firm as a "principal-agent" pair, we examine firms' rivalry in bonus/penalty contracts in oligopolistic markets when the agents are risk-neutral. Under standard assumptions concerning production, demand, and cost functions, we show that bonus/penalty contracts may be used for strategic purposes. We find that whether agents' actions would (in equilibrium) be encouraged through bonuses or discouraged through penalties would critically depend on the existing strategic relationships between agents' actions or firms' products. We further show that firms' capita] stocks can affect their strategic positions in the bonus/penalty rivalry. The social welfare implication of the bonus/penalty rivalry is also examined. In Chapter 2, using a general framework of rivalrous agency with risk-averse agents, we identify two distinctive effects of bonus/penalty contracting, namely, the strategic effect and the incentive effect. We find that the two effects may or may not work in the same direction for a principal-agent pair, depending on the nature of strategic relationships between agents' actions. In Chapter 3, we compare the strategic effects of bonus/penalty contracts with that of linear contracts. We find that, if only one principal is active in designing agency compensation contracts, then he/she would be indifferent between a bonus/penalty contract and a linear contract. If both principals are active in designing agency contracts, however, the choice between bonus/penalty and linear contracts would in general matter to the principals. In particular, we show in an example that both principals would non-cooperatively choose a bonus contract over a linear contract. The second essay of the thesis, as in Chapter 4, presents an analysis of common sales agents based on their precommitment role when consumers are imperfectly informed about the products on the market. We show that an exclusive channel stucture can create a cost due to exclusive channels' inability to commit themselves to sales impartiality. We further show that independent non-cooperative firms may use common agents as a precommitment device to convince potential consumers that the risk of being misrepresented has been reduced or eliminated. We demonstrate that a market involving common sales agents can arise as an equilibrium outcome. Our analysis shows that common sales agents can be welfare improving for both firms and consumers. The third essay, as in Chapter 5, investigates the dynamic pattern of firm competitive conduct, using time-series and firm-specific data for a set of duopoly airline routes. We estimate the mean conduct parameters for each firm and each period, and infer whether the data are consistent with the Cournot, Bertrand, Friedman, or Green-Porter models. We find that airlines' competitive behavior may switch between the competitive and collusive regimes. Moreover, we find that airline profits in a collusive period appear less than the (single-period) monopoly profits, and the degree of overall market competitiveness is between the Cournot and monopoly solutions but closer to the Cournot solution. Our data suggest that major carriers might use quantity volumes, rather than prices, as their strategy variables. We also conduct some Bayesian analysis of seeing how our results would influence priors associated with different models. We illustrate a model choice criterion based on Bayesian analysis and use the criterion to choose the "best" model among competing models.Business, Sauder School ofGraduat