Delegation in a Vertically Differentiated Duopoly

Fatima Barros and Isabel Grilo
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Fatima Barros: CORE, Université catholique de Louvain, B-1348 Louvain-la-Neuve, Belgium and Universidade Catolica Portuguesa, Lisbon, Portugal
Isabel Grilo: CORE, Université catholique de Louvain, B-1348 Louvain-la-Neuve, Belgium

No 1993035, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: In a context of vertical product differentiation we analyze the effect of delegation on quality. We consider a duopoly where firms can delegate to an agent the quality determining activities. The quality level is determined by the level of a random fixed cost. The actual realization of this fixed cost is known, at no cost, to the firm or to the agent that undertakes the activities a..c;sociated with this fixed cost. By delegating a firm faces an asymmetry of information since the owner cannot observe the realization of the random variable, while his agent has ex ante full information concerning the actual state of nature. When one firm delegates and the other does not, we find two equilibria that mimic the full information situation, and two equilibria which display quality levels for the delegating firm lower than the full information ones. When the delegation decision is endogenous there are equilibria configurations with zero, one and two delegating firms.

Date: 1993-09-01
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