Ownership, Control and Collusion

The paper considers how the separation between ownership and control affects product-market competition in mature (repeated) oligopolies. It finds that as long as managers have a preference for smooth profits, as revealed by the empirical evidence on quot;income smoothing,quot; by delegating control owners can sustain any tacit collusive agreement at lower discount factors. Common quot;low-poweredquot; managerial incentives with monetary bonuses or incumbency rents make the joint monopoly collusive agreement supportable at any discount factor. The low pay-performance sensitivity for CEOs found by Jensen and Murphy (1990) and Kaplan (1994) is then quot;optimal,quot; it maximizes firms' (collusive) profits. It is also shown that when managers are in control price wars during booms need not occur; the most collusive price may instead be pro-cyclical