An analysis of managerial delegation in a market with vertically-integrated producer owning an essential input monopolistically

Chung-Hui Chou ()
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Chung-Hui Chou: I-Shou University

Review of Economic Design, 2023, vol. 27, issue 1, No 11, 247-265

Abstract: Abstract This paper analyzes managerial delegation in a market with a vertically-integrated producer (VIP) which owns an essential input for retail goods production monopolistically and an independent downstream producer (IDP) which is capable of producing retail goods more efficiently than the VIP. Our research obtains the following results which sharply contrast to those presented in the existing literature. First, we discover that both VIP and IDP owners place a weight larger than $$1$$ 1 on profit levels in the incentive schemes which induces managers to act less aggressively in quantity competition, but encourages VIP manager to act more aggressively in pricing of essential inputs. As a consequence, managerial delegation reduces output levels of the retail goods in spite of a lower price of essential inputs. Second, VIP owner regards the weights on profit levels as strategic substitutes, whereas IDP owner regards them as strategic complements. Third, even though the VIP owns an essential input monopolistically, it has an incentive to reduce marginal costs of retail goods production. Furthermore, the VIP may be more-motivated to invest in cost-reducing research and development (R&D) in retail goods production than the IDP when the scale of retail goods market is sufficiently large. From the above reasoning, managerial delegation tends to reduce consumers’ surplus and social welfare in the short-run; however, it may yield more reductions in marginal costs of retail goods production resulting from cost-reducing R&D and improves consumers’ surplus and social welfare in the long-run when marginal costs of the essential input are sufficiently low under which the IDP may coexist with VIP in the retail goods market.

Keywords: Essential input; Independent downstream producer; Quantity competition; Managerial delegation; Vertically-integrated producer (search for similar items in EconPapers)
JEL-codes: L11 L12 L13 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s10058-021-00274-3

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