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Managerial Delegation of Competing Vertical Chains with Vertical Externality

Choi Kangsik (), Ki-Dong Lee () and Lim Seonyoung ()
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Choi Kangsik: Graduate School of International Studies, Pusan National University, Kumjeong-ku46241, Korea (the Republic of)
Lim Seonyoung: Investment Promotion Division, Busan Metropolitan City, 1001 Jungang-daero, Yeonje-Gu, Busan, Korea (the Republic of)

The B.E. Journal of Theoretical Economics, 2020, vol. 20, issue 2, 18

Abstract: We examine that the bilateral supplier affects the incentive contracts that owners of retailers offer their managers, assuming that the manufacturer sets the input price after observing the terms of the incentive contracts offered to management in the downstream market. Thus, we compare the two models: (1) decentralized bargaining between manufacturers and retailers including two-part tariff contract (2) linear input pricing without bargaining. Contrast to previous studies, we find that in equilibrium, the owners of retailers offer delegation contracts to managers for output restriction regardless of competition modes when offering linear input pricing, which implies that owners do not face a prisoners’ dilemma situation and Pareto superior profit is obtained for retailer. Thus, managerial delegation of retailer is not socially desirable due to the output restriction. Furthermore, decentralized bargaining allows to equalize all the equilibrium outcomes in the different delegation structure under both Bertrand and Cournot competition and leads no delegation for the endogenous delegation problem.

Keywords: delegation; linear input pricing; Nash bargaining; Bertrand; Cournot (search for similar items in EconPapers)
JEL-codes: D43 L13 M21 (search for similar items in EconPapers)
Date: 2020
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