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Managerial Delegation of Competing Vertical Chains with Vertical Externality

Author

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  • Choi Kangsik

    (Graduate School of International Studies, Pusan National University, Kumjeong-ku46241, Korea (the Republic of))

  • Lee Ki-Dong

    (Department of International Commerce, Keimyung University, 1095, Dalgubeol-daero, Dalseo-Gu, Daegu42601, Korea (the Republic of))

  • Lim Seonyoung

    (Investment Promotion Division, Busan Metropolitan City, 1001 Jungang-daero, Yeonje-Gu, Busan, Korea (the Republic of))

Abstract

We examine that the bilateral supplier affects the incentive contracts that owners of retailers offer their managers, assuming that the manufacturer sets the input price after observing the terms of the incentive contracts offered to management in the downstream market. Thus, we compare the two models: (1) decentralized bargaining between manufacturers and retailers including two-part tariff contract (2) linear input pricing without bargaining. Contrast to previous studies, we find that in equilibrium, the owners of retailers offer delegation contracts to managers for output restriction regardless of competition modes when offering linear input pricing, which implies that owners do not face a prisoners’ dilemma situation and Pareto superior profit is obtained for retailer. Thus, managerial delegation of retailer is not socially desirable due to the output restriction. Furthermore, decentralized bargaining allows to equalize all the equilibrium outcomes in the different delegation structure under both Bertrand and Cournot competition and leads no delegation for the endogenous delegation problem.

Suggested Citation

  • Choi Kangsik & Lee Ki-Dong & Lim Seonyoung, 2020. "Managerial Delegation of Competing Vertical Chains with Vertical Externality," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 20(2), pages 1-18, June.
    • Handle: RePEc:bpj:bejtec:v:20:y:2020:i:2:p:18:n:8
    DOI: 10.1515/bejte-2019-0029
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    Cited by:

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    2. Yasuhiro Arai & Noriaki Matsushima, 2023. "The impacts of suppliers and mutual outsourcing on organizational forms," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 56(1), pages 114-132, February.
    3. Buccella Domenico & Meccheri Nicola, 2024. "Management Centrality in Sequential Bargaining: Implications for Strategic Delegation, Welfare, and Stakeholder Conflict," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 24(1), pages 159-193, January.
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    5. Habiger, Peter & Kopel, Michael, 2020. "Strategic delegation in successive oligopolies with differentiated firms," Economics Letters, Elsevier, vol. 194(C).

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    More about this item

    Keywords

    delegation; linear input pricing; Nash bargaining; Bertrand; Cournot;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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