A Model of a Price-Setting Duopoly with a Wage-Rise Contract

This paper considers a wage-rise-contract between a firm and its employees as the firm's strategy, and suggests a wage-rise-contract policy. The policy is a promise by the firm that it will announce a certain output level and a wage premium rate, and if it actually produces more than the announced output level, then it will pay each employee a wage premium uniformly. First, this paper examines the case in which one of two firms unilaterally offers the wage-rise-contract policy by using a two-stage price-setting duopoly model. It is then shown that there exists an equilibrium which coincides with the Stackelberg solution where the firm adopting the policy is the leader. Next, this paper examines the case in which both firms can offer the wage-rise-contract policy in the model. It is then shown that there exists an equilibrium which is more profitable for both firms than in the unilateral case