CONFLICT OF INTERESTS IN DUOPOLY.

This paper offers a new perspective of the principal-agent problem in Cournot duopoly when the manager (Agent) of Company 1 is paid in share of the profit, but at the same time owns a share of the competitive company where he does not have executive authority. The latter fact might be misleading since, as it is shown in this paper, even without executive power the share in competitive company triggers a wide set of the effects on the Principal, the co-owners of the competitive company, competitiveness and consumer’s welfare. A computational model was built, analysing behaviour of both the Principal and the Agent, but also the other market participants: co-owners and consumers. So far it has not been made in a computational form, but in the normative form only. The model has provided three ways of proving the findings presented in this paper: graphical analysis, algebraic analysis using calculus and numerical examples. They have jointly provided the following conclusions: the higher is the Agent’s share in the competitive company, even though the Agent has no executive powers in that company, the lesser is the production level of the Principal’s company, and the greater is the production level of the other company. Also, the higher is the share of the Agent, the higher has to be his share in profit given by the Principal, depleting Principal’s profit and increasing the profit of the Agent’s co-owners. It is also shown that, as compared to the basic Cournot model, the higher is the Agent’s share in the competitive company, the lower is competition level measured in the equivalent number of companies. It also increases the price level. In this way consumers also suffer since the model has shown that the Agent’s market share causes prices to increase and the overall market coverage to fall. [ABSTRACT FROM AUTHOR]