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Cost Pass-Through under Delegation

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  • Ritz Robert A.

    (Oxford University, robert.ritz@nuffield.ox.ac.uk)

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.

Suggested Citation

  • Ritz Robert A., 2009. "Cost Pass-Through under Delegation," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 8(1), pages 1-19, January.
    • Handle: RePEc:bpj:bejtec:v:8:y:2009:i:1:n:30
    DOI: 10.2202/1935-1704.1383
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    References listed on IDEAS

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    More about this item

    Keywords

    cost pass-through; excise taxation; executive compensation; market share; strategic delegation;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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