Cost Pass-Through under Delegation

Robert Ritz

The B.E. Journal of Theoretical Economics, 2009, vol. 8, issue 1, 19

Abstract: The rate of cost pass-through exceeds 50% under strategic delegation of decision-making to managers with sales revenue contracts--regardless of the number of firms in the industry and demand curvature. This contrasts sharply with profit-maximization, for which cost pass-through can take on any positive value. The key intuition is that firms under delegation act as if they faced more rivals than they actually do, thus pushing cost pass-through towards 100%. Cost pass-through with market share contracts is similarly bounded below, and this note also generalizes existing results on equilibrium characterization for this case.

Keywords: cost pass-through; excise taxation; executive compensation; market share; strategic delegation (search for similar items in EconPapers)
Date: 2009
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DOI: 10.2202/1935-1704.1383

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