Discriminatory input pricing and strategic delegation

This paper examines how discriminatory input pricing by an upstream monopolist affects the incentives that owners of downstream duopolists offer their managers. Regardless of the mode of competition (quantity or price), owners of downstream firms induce their managers to be more profit‐oriented and to behave less aggressively when the monopolist is allowed to price‐discriminate than when he charges a uniform price. If the monopolist price‐discriminates, managerial downstream firms always earn more than owner‐managed profit‐maximizing firms. However, if the monopolist charges a uniform price, managerial downstream firms earn more than profit‐maximizing counterparts under price competition and earn less under quantity competition. Copyright © 2009 John Wiley & Sons, Ltd.     

Managerial delegation games and corporate social responsibility

In a duopoly in which firms universally engage in corporate social responsibility (CSR) activities, this paper shows that, in contrast to the main tenet of the received managerial delegation literature, if the CSR sensitivity is sufficiently high: (a) when both firms delegate output decisions to managers, at the equilibrium profit (resp. consumer welfare) is higher (resp. lower) than when firms are pure CSR; (b) in a managerial delegation game, asymmetric multiple subgame perfect Nash equilibria emerge in which one firm delegates and the rival does not. These results hold under both the “sales delegation” and “relative profits” manager's bonus schemes.     

Bargaining over managerial contracts in delegation games: managerial power,contract disclosure and cartel behavior

Modern corporate governance codes include clauses requiring the disclosure of managerial compensation. Such codes have been installed to protect shareholders' interests. In this paper, we explore the impact of such disclosure on consumer welfare. We consider two‐stage delegation games in which owner‐shareholders negotiate about compensation with their managers in the game's first stage. At the end of the first stage, the managerial compensation contract outcomes of the bargaining process are publicly announced. In the second stage, Cournot competition evolves. We prove that sales delegation generates equilibria radically different from relative performance delegation. Using classical Cournot as the benchmark, contractual bargaining over sales compensation gives tougher product market competition—and hence higher consumer surplus. The opposite holds true for relative performance delegation. Then, cartel behavior is promoted, reducing consumer surplus. Copyright © 2007 John Wiley & Sons, Ltd.     

External bargaining versus internal manipulation: A theory of managerial delegation

Does the competition mode influence the delegation decisions of the firm owners? By constructing a vertical negotiation game model, we find that under Cournot competition in the downstream market, the downstream firm's owner will not choose delegation, whereas under Bertrand competition, the downstream firm's owner will choose delegation. If the product substitution is relatively large, the adoption of delegation management by the owners of downstream firms under Bertrand competition will bring higher profits. It further shows that compared with the situation of no delegation, delegation management may reverse the social welfare ranking under Bertrand and Cournot competitions.     

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.     

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.     

R&D in a strategic delegation game

This paper studies how a separation of ownership and management affects firms' R&D and production decisions in Cournot quantity competition. It is found that when R&D spillovers are small, owners strategically direct their managers away from profit maximization towards sales. Consequently, managerial firms invest more in R&D and have higher output and lower prices compared to their entrepreneurial counterparts. On the other hand, when spillovers are large, owners ‘penalize’ managers for sales. In this case, managerial firms have lower R&D, lower output and higher prices. Nonetheless, managerial firms have lower profits than their entrepreneurial counterparts regardless of spillovers. This paper also examines the welfare effects of a separation of ownership and management. It is found that in terms of first-best social welfare, managerial firms are more (less) efficient than their entrepreneurial counterparts with low (high) spillovers. However, in terms of second-best social welfare, managerial firms are less efficient with all spillovers. © 1997 John Wiley & Sons, Ltd.     

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.     

The Bargaining–sales‐delegation Game

This article revisits the managerial delegation literature led by Vickers ( 1985 ), Fershtman and Judd ( 1987 ) and Sklivas ( 1987 ) by introducing a bargaining mechanism between owners and managers over managerial contracts. It shows that the degree of bargaining interacts with the extent of product differentiation in determining whether the sub‐game perfect Nash equilibrium is sales delegation or profit maximisation. In contrast with the classical result, no sales delegation emerges and the typical prisoner's dilemma of the managerial delegation literature is solved. This holds in both contexts of Cournot and Bertrand rivalries. The article also provides results for the more general cases with heterogeneous managerial bargaining power and endogenous decisions of the owners regarding the bargaining power of the manager that should be or not be hired in a firm. Copyright © 2016 John Wiley & Sons, Ltd.     

Commitment in R&D tournaments via strategic delegation to overoptimistic managers

This paper shows that it is profitable for a firm to hire an overoptimistic manager to commit to a certain investment strategy in an R&D tournament situation. In the unique symmetric equilibrium, all firms delegate to overoptimistic managers, where the optimal degree of overoptimism depends on the riskiness of the tournament. In these situations a manager's type may serve as a substitute for delegation via contracts. By delegating to overoptimistic managers, firms can escape the rat race nature of R&D tournaments. Copyright © 2010 John Wiley & Sons, Ltd.     

Biased Managers as Strategic Commitment

This paper analyzes a model in which owners of competing firms can hire biased managers for strategic reasons. We show that independent of the mode of competition, that is, price or quantities, owners hire aggressive managers. This result contrasts with the classic literature on strategic delegation. Copyright © 2013 John Wiley & Sons, Ltd.     

Bargaining over Managerial Contracts in Delegation Games: The Generalized Oligopolistic Case

The main purpose of this paper is to disclose the properties of the equilibrium outcomes in the differentiated‐products model with two stages: (i) owner‐shareholders negotiate managerial compensation with their managers that comprises their profits and sales (sales delegation) and (ii) they engage in their market competition. The other purpose of this paper is to study the differentiated goods model in which an owner bargains the managerial compensation with her/his manager that comprises her/his profit and her/his rival's profit (relative performance delegation). We further investigate the situation wherein the firm with sales delegation and the firm with the relative performance delegation coexist. Copyright © 2012 John Wiley & Sons, Ltd.     

Strategic trade policy with bargaining over managerial contracts

This paper re‐examines the well‐known activist regime's inefficiency (governments set export subsidies) in a sales–delegation game with owner–manager bargaining over contracts. Contrary to the received literature, this bargaining process may (a) induce governments to set a tax if products are not too substitute or complements and (b) lead to an efficient (inefficient) equilibrium provided that products are sufficiently differentiated (not too complements). Therefore, unilateral public intervention can be optimal: in case of rival governments' retaliation, under appropriate product competition degrees, welfares are larger than under free trade even for small managers' power. Thus, managerial delegation practices are crucial also for international trade issues.     

R&D spillovers and strategic delegation in oligopolistic contests

Considering oligopolistic contests with R&D spillovers and strategic delegation three results can be obtained: (1) There exist multiple asymmetric equilibria where one owner highly favors sales as a basis for his manager's incentives which drives the other firm out of the market. (2) If R&D spillovers are zero, a managerial firm will have a strong strategic advantage when competing with an entrepreneurial firm. If both owners endogenously decide about delegation, each owner's dominant strategy will be to delegate, given that the manager's reservation value is not too large. (3) If R&D spillovers are maximal, collusive market outcomes become very likely, which makes strategic delegation less important. Copyright © 2004 John Wiley & Sons, Ltd.     

Strategic Delegation with Multiproduct Firms

This paper shows that a multiproduct firm may find it optimal not to delegate the sales of all products and therefore to employ different distribution channels for different products. It faces the following trade-off: There is a strategic effect associated with delegation, but if both products' sales are delegated, intrafirm competition is not internalized. By delegating the sales of just one of the products while selling the other product directly—partial delegation—the multiproduct manufacturer strikes just the right compromise: The externalities between its owns products are internalized partially while a strategic advantage is achieved against its rival single-product manufacturer. Partial delegation also holds if both products are sold by a common retailer; it dominates full delegation when both manufacturers are multiproduct firms .     

Incentive pay and rent in oligopoly

Our purpose is to examine strategic delegation in nonlinear Cournot oligopoly. The findings generalize earlier results and show that managerial contracts reward sales under the condition of a fixed input price. Alternatively, under a variable input price, owners might punish sales even when goods are strategic substitutes. We conclude that optimal strategic motivation depends critically on the input price. For example, motivation that supports positive owner profit under a fixed input price nullifies owner-profit if an upstream monopolist with convex costs sets the input price. In a vertical relationship between a duopoly and an upstream monopolist, strategic delegation punishes sales.     

Managerial optimism and investment choice

This paper analyzes whether it might be desirable for a firm to hire an overoptimistic manager to commit to a certain R&D strategy. I consider a Cournot model with an ex‐ante R&D stage where firms can invest in cost reduction before product market competition takes place. I show that firms want to hire overoptimistic managers and argue that a manager's type may serve as a substitute for strategic delegation via contracts. Copyright © 2010 John Wiley & Sons, Ltd.     

Endogenous timing of managerial delegation contracts in a unionized duopoly

In a multiple‐stage duopoly game with strategic delegation and unionized labor market, this paper analyzes whether firms' owners decide managerial incentive contracts sequentially or simultaneously. When firms compete in quantities, firms' owners can choose incentive contracts simultaneously or sequentially, depending on the unions' relative bargaining power and the degree of product differentiation. Instead, when firms compete in prices, firms' owners set incentive contracts sequentially with substitute goods and simultaneously with complement goods.     

Apple's disaster: Linking two‐sided markets and strategic delegation

Asymmetric pricing structure and different intergroup network externalities are characteristics of two‐sided markets not captured in the analysis of one‐sided markets. Focusing on Cournot duopoly where membership decision may be delegated to a manager, several equilibrium regimes are sustained depending on the fixed cost of managerial hiring and strength of the network externality exerted by the side whose demand is more price sensitive. The change from null to full delegation sharpens the asymmetric pricing structure and reduces the price level in two‐sided markets. Contrary to one‐sided markets with direct network effects, the prisoner's dilemma holds for sufficiently strong indirect network externalities. Imperfect interside discrimination of managerial incentives ensures profit maximization and efficient consumers' allocation. Private hiring should occur when the two‐sided market exhibits symmetric pricing structure. An explanation for Apple's unprecedented event is provided. The reduction of revenue and managerial bonus in 2016 may be justified by the dissemination of full delegation in the Chinese information technology industry. Apple's upcoming strategy may consist on reducing both access prices, although the side whose demand is more price sensitive should have a greater price reduction. Alternatively, improving the content quality may constitute Apple's corporate strategy, thereby inducing a skimming pricing strategy on Chinese rivals.     

Competition with Aftermarket Power When Consumers Are Heterogeneous

We study a model of competitive foremarkets and partly monopolized aftermarkets. We show that high aftermarket power prompts firms to engage in inefficiently aggressive below‐cost pricing in the foremarket. This inefficiency is driven by the presence of consumers with valuations below marginal cost. While for intermediate aftermarket power their presence leads to a competition‐softening effect, for high aftermarket power firms attract increasing numbers of unprofitable consumers by aggressively pricing below cost. For high aftermarket power, firms' equilibrium profits can therefore be decreasing in aftermarket power but are always higher than for low aftermarket power. If firms engage in price discrimination by bundling the foremarket and aftermarket goods or by reducing their aftermarket power, they avoid selling to unprofitable consumers but also reduce the competition‐softening effect. This decreases firms' equilibrium profits but increases consumer and social welfare.