On the role of network externalities in strategic delegation contracts with an industry-wide union

Haiyang Hou, Shihuang Hong and Chunyu Zhao

Applied Economics Letters, 2017, vol. 24, issue 21, 1621-1628

Abstract: This article analyses the role of network externalities in managerial delegation contracts for differentiated products when the marginal product costs (the wage) are set by an industry-wide union. The results show that, in both Bertrand and Cournot equilibria, each owner offers a profit-oriented incentive scheme to his or her managers by penalizing sales maximization, irrespective of the strength of the network externalities. In the presence of weak network externalities and low product differentiation, firms can obtain higher profits in the equilibrium under Cournot-type quantity competition compared with that under Bertrand-type price competition. Furthermore, the wage chosen by the union is higher in the Cournot than in the Bertrand equilibrium. In the Cournot equilibrium, the wage increases with the strength of the network externalities. However, in the Bertrand equilibrium, there exists a threshold level of the degree of product differentiation.

Date: 2017
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DOI: 10.1080/13504851.2017.1368980

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