Strategic management under duopoly

The purpose of this paper is to present a general conjectural variation model to provide an integrative treatment of strategic management under duopoly. It is shown that the nature of the desired distortion of managers' incentives depends critically on the magnitudes of the managers' conjectural variations with respect to outputs as well as the owners' conjectural variations with respect to incentives. In particular, it has been demonstrated that when the owners' conjectural variations with respect to incentives are zero, the owners will motivate their managers to maximize profits and provide no incentives for sales under consistent conjectures. However, the owners make their managers behave more (less) aggressively and produce more (less) than profit-maximizers if the managers' conjectural variations with respect to outputs are larger (smaller) than the actual response.     

Managerial style and the strategic choice of executive incentives

This paper analyzes a two-stage duopoly model where owners provide incentives to managers who then select output levels. Unlike the previous Cournot models on the strategic use of incentives (e.g. Fershtman and Judd, 1987; Sklivas, 1987), managers hold different beliefs about their rivals. Managers and executives are classified by ‘management style’ based on the aggressiveness of their beliefs. It is shown that many of the standard results of the strategic managerial incentive literature no longer hold when executives have differing managerial styles. For example, owners may ‘penalize’ their managers for sales, or they may optimally instruct their managers to maximize profits, in contrast to the standard Cournot findings. Indeed, the model yields a necessary and sufficient condition for compensation contracts to specify pure profit-maximizing behavior when managers have differing managerial styles. Thus, the analysis suggests that when ownership and control are separated, owners must carefully assess the belief structure (management style) of their executives before designing the compensation package.     

Incentives,Capital Budgeting,and Organizational Structure

Divisional managers compete for financial resources in what is often referred to as an internal capital market. They also have a common interest in maximizing corporate profits, as this determines the resources available to the firm as a whole. Both goals are powerful motivators but can at times conflict: while the amount of resources available to the firm depends on corporate performance, divisional funding depends upon the division's performance relative to the rest. We propose a model in which organizational form is endogenous, divisions compete for corporate resources, and managers have implicit incentives. We show that organizational design can help companies influence their divisional managers' potentially conflicting goals. Our analysis relates the firm's organizational structure to the source of incentives (external vs. internal), the nature of the incentives (competition vs. cooperation), the level of corporate diversification, the development of the capital market, and to industry and firm characteristics.     

Delegation and strategic incentives for managers in contests

Owners usually want their managers to maximize profits. As the literature on strategic delegation has shown it may be beneficial to owners to put a positive weight on sales in the optimal linear incentive scheme for managers to make them behave more aggressively in the market. This paper shows that if the competition between the managers can be characterized as a contest, owners may induce their managers to maximize sales. Moreover, there is a first‐mover advantage for owners when choosing their incentive schemes. If delegation is endogenous the type of contest will determine whether all owners delegate their decisions to managers or not. Copyright © 2002 John Wiley & Sons, Ltd.     

Endogenous managerial incentive contracts in a differentiated duopoly,with and without commitment

In a differentiated Cournot duopoly, we examine the contracts that firms' owners use to compensate their managers and the resulting output levels, profits and social welfare. If products are either sufficiently differentiated or sufficiently close substitutes, owners use Relative Performance contracts. For intermediate levels of product substitutability, they use Market Share contracts. When owners do not commit over the types of contracts, each type is an owner's best response to his rival's choice. Product substitutability has differential effects on output levels and profits, depending on the configuration of contracts in the industry. Finally, managerial incentive contracts are welfare enhancing if they increase consumers' surplus. Copyright © 2010 John Wiley & Sons, Ltd.     

Common holdings and strategic manager compensation: The case of an asymmetric triopoly

We study an asymmetric triopoly in a heterogeneous product market where quantity decisions are delegated to managers. The two biggest firms are commonly owned by shareholders such as index funds, whereas the smallest firm is owned by independent shareholders. Under such a common holding owner structure, the owners have an incentive to coordinate when designing their manager compensation schemes. This coordination leads to a reallocation of production and induces a redistribution of profits. The trade volume in the market is reduced so that shareholder coordination is detrimental to consumer surplus as well as welfare.     

Vertical externality and strategic delegation

This paper examines the effects of vertical externality generated by the upstream monopoly on the incentives that owners of competing downstream firms give their managers. It is shown that the introduction of the upstream monopoly may have significant effects on the incentive schemes for the downstream firms' managers. In particular, it is shown that in equilibrium, each owner obtains the simple Nash equilibrium outcome regardless of the mode of competition (quantity or price) in the downstream market. Copyright © 2002 John Wiley & Sons, Ltd.     

Investment decisions and managerial compensation design in the presence of product market rivalry

We consider an economy where firms operate in an imperfectly competitive industry and mutually affect each others’ investment opportunities. Each firm is assumed to face a mutually exclusive choice of investing in either a short‐ or a long‐term project. For example, firm i's commitment to a short‐term project cuts into firm j's market in the short‐term but frees‐up firm j's long‐term market, and vice versa. Our results show that, even in the absence of an owner–manager conflict, the owner anticipates the product market rivalry and optimally compensates their managers with short‐ as well as long‐term compensation. Although the optimal compensation design induces myopic investment decisions, it is shown to be in the owners’ best interest. Copyright © 1999 John Wiley & Sons, Ltd.     

Strategic delegation in oligopolistic tournaments

This paper considers a two-stage game with two owners and two managers. At the first stage, the owners choose a linear combination of profits and sales as incentives for their managers. At the second stage, the two managers compete in an oligopolistic tournament against each other. The findings substantially differ from the results for Cournot or Bertrand oligopoly: There exist asymmetric equilibria where one owner puts a positive weight on sales and the other a negative one, although the structure of the game is completely symmetric. If the influence of noise vanishes, the owner of the more aggressive firm will even induce sales maximization to his manager in order to preempt his competitor. Received: 22 April 2004, Accepted: 25 December 2005 JEL Classification: L1, M2 I would like to thank the editor Semih Koray, two anonymous referees, Ulf Schiller, Dirk Sliwka, Gunter Steiner, and the participants of the Microeconomics Seminar of the Humboldt University at Berlin for very helpful comments. Financial support by the Deutsche Forschungsgemeinschaft (DFG), grant KR 2077/2-3 and SFB/TR 15 ("Governance and the Efficiency of Economic Systems"), is gratefully acknowledged.     

Managerial Incentives for Takeovers

The paper studies managerial incentives in a model where managers choose product market strategies and make takeover decisions. The equilibrium contract includes an incentive to increase the firm's sales, under either quantity or price Competition. This result contrasts with previous findings in the literature, and hinges on the fact that when managers are more aggressive, rival firms earn lower profits and thus are willing to sell out at a lower price. However, as a side effect of such a contract, the manager might undertake unprofitable takeovers.     

Integration, Complementary Products, and Variety

This paper examines the incentives for integration when the market for consumer durables (hardware) is oligopolistic and the market for complementary services (software) is monopolistically competitive. We find that the equilibrium industry structure will depend on the magnitude of the fixed costs of software development. If the software development costs are relatively large, the equilibrium industry structure is unintegrated, that is, neither hardware firm integrates; if the software development costs are relatively small, the equilibrium industry structure is integrated, that is, both hardware firms integrate. Under the integrated industry structure, hardware profits are lower, less varieties are provided, and hardware prices are lower than under the unintegrated industry structure. The game has a prisoners' dilemma structure when the software development costs are relatively small because of a foreclosure effect. Strategically increasing the number of software varieties provides an avenue for an integrated hardware firm to increase its market share and profits by reducing the number of software varieties available for an unintegrated rival technology. Although consumer surplus is higher under an integrated industry structure, the total surplus associated with the unintegrated industry structure exceeds that of the integrated industry structure.     

The business case for sustainability? An examination of small firms in the UK's construction and restaurant sectors

Studies show that despite a concerted attempt by UK policy‐makers to portray ‘eco‐efficiency’ measures as cost reducing, most owner‐managers of small firms view environmental measures as expensive to undertake. As a result, owner‐managers tend to be highly resistant to voluntarily improving their environmental performance. Given that SMEs are such a vast sector of the economy, this perceived discord between profits and environmental protection is clearly a major barrier to the ‘greening’ of industry. This ESRC‐funded study has sought to unearth the underlying motivations for why SME owner‐managers in the UK resist or accept the idea that there are business benefits for improving their environmental performance. The findings from 40 in‐depth interviews with SME owners in the UK's construction and restaurant sectors and 12 ‘key informants’ from industry and government are presented, followed by a discussion of SME perspectives on the ‘business case’ for sustainability and its implications for policy‐makers. Copyright © 2005 John Wiley & Sons, Ltd and ERP Environment.     

Firm governance and duopoly: in weakness may lie strength

The paper proposes a model of firm governance when two firms compete in a duopoly. The paper assumes that a motivational asymmetry exists between owners and managers: owners wish to obtain maximum profits, managers wish to maximize sales. Managers perceive that salary, social status or future job prospects are more closely associated with firm size (i.e. sales) than with firm profits. The paper takes an agency view of the firm where owners only indirectly influence the behaviour of firms through the level of control they exert over managers. The paper demonstrates that a weakly governed firm, acting as a sales maximizer, can gain a competitive advantage over a strongly governed firm, acting as a profit maximizer. The paper examines the extent of this advantage under cost leadership and differentiation strategies. The paper also demonstrates that the objectives of profit maximization and maximization of competitive advantage are not necessarily congruent. The paper graphically represents the profit functions of the two firms illustrating the Nash equilibrium under Cournot and Stackelberg conditions. Copyright © 2007 John Wiley & Sons, Ltd.     

Relative performance as a strategic commitment mechanism

Can managers' personality traits be of use to profit maximizing firm owners? We investigate the case where managers have a variety of attitudes toward relative performance that are indexed by their type. We consider two stage games where profit maximizing owners select managers in the first stage, and these managers, knowing each other's types, compete in a duopoly game in the second stage. The equilibria of various types of competition are derived and comparisons are made to the standard case where managers are profit maximizers. We show that managers' types can be used as a strategic commitment device that can increase firm profits in certain environments. Copyright © 2002 John Wiley & Sons, Ltd.     

Endogenous Technological Spillovers: Causes and Consequences

We develop a new approach to endogenizing technological spillovers. We analyze a game in which firms can first invest in cost-reducing R&D, then compete on the human-capital market for their knowledge-bearing employees, and finally enter the product market. If R&D employees change firms, spillovers arise. We show that technological spillovers are most likely when they increase total industry profits. We use this result to show that innovation incentives are usually stronger for endogenous than for exogenous spillovers and that endogenous spillovers may reverse the result that innovation incentives are stronger under quantity competition than under price competition. Finally, we explore the robustness of our results with respect to contractual incompleteness and the number of R&D workers.     

Wholesale price discrimination: Innovation incentives and upstream competition

In intermediate good markets where there are alternative supply sources, wholesale price discrimination may enhance innovation incentives downstream. We consider a vertical chain where a dominant firm and a competitive fringe supply imperfect substitutes to duopoly retailers which carry both varieties. We show that a ban on price discrimination by the dominant supplier makes uniform pricing credible and reduces retailers’ incentives to decrease the cost of acquiring the competitively supplied variety, leading to higher upstream profits and lower downstream welfare. Our analysis complements existing results by identifying a novel channel through which wholesale price discrimination can improve dynamic market efficiency.     

房地产企业全面预算管理实施路径

在国家“房住不炒”的宏观环境和融资政策不断收紧的调控背景下,房地产企业为了更好地适应市场发展,需加强全面预算管理的把控,尤其要关注全过程的风险控制和监督管理,这是当前房地产行业面临的重要问题。在提高房地产行业的计划、调控、评价能力,从而促进管理者全面地了解房地产公司的经营目标、年终利润和战略策略,以及安排公司项目的进度、调配、成本、筹划等的费用方面,全面预算管理将会发挥关键的作用。     

Stable R&D Cooperation with Spillovers

The literature on the incentives for R & D cooperation with spillovers typically deals only with the factors affecting cooperative profits. This paper focuses on the incentives to cheat and the stability of such cooperative agreements in a repeated game framework. It is shown that the stability of cooperation is influenced by the nature and magnitude of spillovers, relative to the nature and degree of product market competition. While cooperative profits are higher with large positive (exogenous, unintended) know-how spillovers, such as in fundamental research, our anslysis shows that it may be easier to sustain cooperation in areas with lower spillovers, such as applied research, because of the smaller incenfives to cheat on the initial agreement, at least when firms produce substitutes. Alternatively, the possibility of technology sharing (i.e., intended or endogenous spillovers), besides R&D coordination, not only increases cooperative profits but also reduces the incentives to defect from a cooperative equilibrium.     

Vertical differentiation,product innovation,and dynamic competition

This paper presents an infinite horizon dynamic model in which two firms compete in a market vertically differentiated by the qualities of their products and consumers have heterogeneous preferences for quality. Given the product qualities offered, the firms engage in price competition that segments the market. In each period each firm can spend on product innovation that if successful increases the quality of its product. Three types of Markov perfect equilibria are identified. A running–coasting equilibrium exhibits increasing quality dominance with one firm undertaking innovation and the other coasting to free ride on the innovation by the first firm. The firm that coasts can have the larger dynamic payoff, so quality dominance does not imply payoff dominance. A second is a leap‐frog equilibrium in which the trailing firm undertakes innovation to leap into the lead. The trailing firm never innovates solely to narrow the gap with the leader, so catch up strategies are never used. In the third both firms undertake innovation, but if both have innovation successes, product differentiation remains the same and profits are reduced by the cost of innovation. The rivalry between Intel and AMD in microprocessors for personal computers provides a motivating example.     

Managerial Bonus Systems in a Differentiated Duopoly: A Comment

A differentiated Cournot duopoly is considered where firm owners delegate the output decision to a manager, who is rewarded on the basis of his performance. If this performance is measured in terms of (i) pure profits, (ii) a combination of profits and sales, (iii) a combination of profits and market share or (iv) relative profits, the latter option strictly dominates the others if the products are perfect substitutes. Recently it was claimed that this result does not hold for all levels of product substitutability. In this comment, we show however that this result is robust against the introduction of product differentiation. Copyright © 2011 John Wiley & Sons, Ltd.