Two-Stage and Three-Stage Games of Constant Price Elasticity of Demand with Lifetime Employment Contracts

This paper considers two-stage and three-stage games of constant price elasticity of demand with lifetime employment as a strategic commitment. If a firm offers lifetime employment, then it chooses an output level and enters into a lifetime employment contract with the number of employees necessary to achieve the output level. This irreversible behaviour causes changes to the quantity-setting competing environment of the future. In the two-stage duopoly game, only one firm is allowed to offer lifetime employment. It is then shown that the offering firm acquires a strategic advantage. Next, the paper examines the three-stage duopoly game. First, the leading firm decides whether to offer lifetime employment, then the following firm observes the leading firm’s move, and subsequently the following firm decides whether to offer lifetime employment. The paper shows that the introduction of lifetime employment into the analysis of three-stage competition is profitable only for the leading firm.