Wage-Rise Contract and Mixed Duopoly with Price Competition

Abstract

This paper investigates a mixed duopoly environment in which a private firm competes on price with a public firm. The following timing of actions is considered. In the first stage, each firm non-cooperatively decides whether to adopt a wage-rise contract as a strategic commitment device. If a firm adopts a wage-rise contract, then it chooses an output level and a wage premium rate, and agrees to pay each employee a wage premium uniformly if it actually produces more than the output level. This irreversible behaviour causes changes to the price-competing market environment of the second stage. The paper presents the equilibrium solution of the mixed duopoly model.

Keywords

• mixed market model
• price competition
• private firm
• public firm
• strategic commitment