Cost pass-through under delegation

Robert Ritz

No 404, Economics Series Working Papers from University of Oxford, Department of Economics

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)
JEL-codes: D43 H20 (search for similar items in EconPapers)
Date: 2008-10-01
New Economics Papers: this item is included in nep-opm
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Journal Article: Cost Pass-Through under Delegation (2009)
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