IDEAS home Printed from https://ideas.repec.org/a/spr/reecde/v27y2023i1d10.1007_s10058-021-00274-3.html
   My bibliography  Save this article

An analysis of managerial delegation in a market with vertically-integrated producer owning an essential input monopolistically

Author

Listed:
  • Chung-Hui Chou

    (I-Shou University)

Abstract

This paper analyzes managerial delegation in a market with a vertically-integrated producer (VIP) which owns an essential input for retail goods production monopolistically and an independent downstream producer (IDP) which is capable of producing retail goods more efficiently than the VIP. Our research obtains the following results which sharply contrast to those presented in the existing literature. First, we discover that both VIP and IDP owners place a weight larger than $$1$$ 1 on profit levels in the incentive schemes which induces managers to act less aggressively in quantity competition, but encourages VIP manager to act more aggressively in pricing of essential inputs. As a consequence, managerial delegation reduces output levels of the retail goods in spite of a lower price of essential inputs. Second, VIP owner regards the weights on profit levels as strategic substitutes, whereas IDP owner regards them as strategic complements. Third, even though the VIP owns an essential input monopolistically, it has an incentive to reduce marginal costs of retail goods production. Furthermore, the VIP may be more-motivated to invest in cost-reducing research and development (R&D) in retail goods production than the IDP when the scale of retail goods market is sufficiently large. From the above reasoning, managerial delegation tends to reduce consumers’ surplus and social welfare in the short-run; however, it may yield more reductions in marginal costs of retail goods production resulting from cost-reducing R&D and improves consumers’ surplus and social welfare in the long-run when marginal costs of the essential input are sufficiently low under which the IDP may coexist with VIP in the retail goods market.

Suggested Citation

  • Chung-Hui Chou, 2023. "An analysis of managerial delegation in a market with vertically-integrated producer owning an essential input monopolistically," Review of Economic Design, Springer;Society for Economic Design, vol. 27(1), pages 247-265, February.
    • Handle: RePEc:spr:reecde:v:27:y:2023:i:1:d:10.1007_s10058-021-00274-3
    DOI: 10.1007/s10058-021-00274-3
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s10058-021-00274-3
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s10058-021-00274-3?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Hamilton, Jonathan H. & Slutsky, Steven M., 1990. "Endogenous timing in duopoly games: Stackelberg or cournot equilibria," Games and Economic Behavior, Elsevier, vol. 2(1), pages 29-46, March.
    2. Lee, Sang-Ho & Muminov, Timur K. & Tomaru, Yoshihiro, 2017. "Partial Privatization And Subsidization In A Mixed Duopoly: R&D Versus Output Subsidies," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 58(2), pages 163-177, December.
    3. Bagwell, Kyle, 1995. "Commitment and observability in games," Games and Economic Behavior, Elsevier, vol. 8(2), pages 271-280.
    4. Matthias Kräkel, 2005. "Strategic delegation in oligopolistic tournaments," Review of Economic Design, Springer;Society for Economic Design, vol. 9(4), pages 377-396, December.
    5. Emanuele Bacchiega & Olivier Bonroy & Emmanuel Petrakis, 2018. "Contract contingency in vertically related markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 27(4), pages 772-791, October.
    6. Anil Arya & Brian Mittendorf, 2018. "Endogenous timing when a vertically integrated producer supplies a rival," Journal of Regulatory Economics, Springer, vol. 54(2), pages 105-123, October.
    7. Odd Rune Straume, 2006. "Managerial Delegation and Merger Incentives with Asymmetric Costs," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 162(3), pages 450-469, September.
    8. Giovanni Maggi, 1999. "The Value of Commitment with Imperfect Observability and Private Information," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 555-574, Winter.
    9. Armstrong, Mark, 1998. "Network Interconnection in Telecommunications," Economic Journal, Royal Economic Society, vol. 108(448), pages 545-564, May.
    10. Fershtman, Chaim & Judd, Kenneth L, 1987. "Equilibrium Incentives in Oligopoly," American Economic Review, American Economic Association, vol. 77(5), pages 927-940, December.
    11. Nakamura, Yasuhiko, 2011. "Bargaining over managerial delegation contracts and merger incentives in an international oligopoly," Research in Economics, Elsevier, vol. 65(1), pages 47-61, March.
    12. Steven D. Sklivas, 1987. "The Strategic Choice of Managerial Incentives," RAND Journal of Economics, The RAND Corporation, vol. 18(3), pages 452-458, Autumn.
    13. Evangelos Mitrokostas & Emmanuel Petrakis, 2014. "Organizational structure, strategic delegation and innovation in oligopolistic industries," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 23(1), pages 1-24, January.
    14. Brito, Duarte & Tselekounis, Markos & Vasconcelos, Helder, 2019. "Input price discrimination in the presence of downstream vertical differentiation," Economics Letters, Elsevier, vol. 184(C).
    15. Rupayan Pal, 2010. "Cooperative Managerial Delegation, R&D And Collusion," Bulletin of Economic Research, Wiley Blackwell, vol. 62(2), pages 155-169, April.
    16. Madden, Paul & Pezzino, Mario, 2019. "Endogenous price leadership with an essential input," Games and Economic Behavior, Elsevier, vol. 118(C), pages 47-59.
    17. Yasuhiko Nakamura, 2011. "Bargaining Over Managerial Delegation Contracts And Merger Incentives With Asymmetric Costs," Manchester School, University of Manchester, vol. 79(4), pages 718-739, July.
    18. Luciano Fanti & Nicola Meccheri, 2017. "A Note on Managerial Delegation with Asymmetric and Convex Costs," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 38(3), pages 279-284, April.
    19. Arijit Mukherjee & Yingyi Tsai, 2014. "Managerial Delegation, Cost Asymmetry and Social Efficiency of Entry," The Economic Record, The Economic Society of Australia, vol. 90(288), pages 90-97, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Michael Kopel & Clemens Löffler, 2008. "Commitment, first-mover-, and second-mover advantage," Journal of Economics, Springer, vol. 94(2), pages 143-166, July.
    2. Giorgos Stamatopoulos, 2016. "Cournot and Stackelberg equilibrium under strategic delegation: an equivalence result," Theory and Decision, Springer, vol. 81(4), pages 553-570, November.
    3. Stamatopoulos, Giorgos, 2018. "Bargaining over managerial contracts: a note," MPRA Paper 86143, University Library of Munich, Germany.
    4. Lisa Planer-Friedrich & Marco Sahm, 2021. "Strategic CSR in Asymmetric Cournot Duopoly," Journal of Industry, Competition and Trade, Springer, vol. 21(1), pages 33-42, March.
    5. 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.
    6. Corona, Carlos & Nan, Lin, 2013. "Preannouncing competitive decisions in oligopoly markets," Journal of Accounting and Economics, Elsevier, vol. 56(1), pages 73-90.
    7. Martin Kolmar & Andreas Wagener, 2013. "Inefficiency As A Strategic Device In Group Contests Against Dominant Opponents," Economic Inquiry, Western Economic Association International, vol. 51(4), pages 2083-2095, October.
    8. Yasuhiko Nakamura, 2017. "Price Versus Quantity in a Duopoly with a Unilateral Effect and with Bargaining over Managerial Contracts," Journal of Industry, Competition and Trade, Springer, vol. 17(1), pages 83-119, March.
    9. Yasuhiko Nakamura, 2017. "Endogenous market structures in a mixed oligopoly with a public firm whose managerial contract is based on welfare and bargaining over the managerial contract of a private firm," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 34(2), pages 189-209, August.
    10. Mariel Leal & Arturo García & Sang-Ho Lee, 2021. "Sequencing R&D decisions with a consumer-friendly firm and spillovers," The Japanese Economic Review, Springer, vol. 72(2), pages 243-260, April.
    11. Hildenbrand, Andreas, 2010. "Cournot or Stackelberg competition? A survey on experimental evidence," MPRA Paper 24468, University Library of Munich, Germany.
    12. Garcia, Arturo & Leal, Mariel & Lee, Sang-Ho & Park, Chul-Hi, 2024. "Merger incentive and strategic corporate social responsibility by a multiproduct corporation," International Review of Economics & Finance, Elsevier, vol. 91(C), pages 193-206.
    13. Yasuhiko Nakamura, 2011. "Strategic managerial delegation and cross-border mergers," Journal of Economics, Springer, vol. 104(1), pages 49-89, September.
    14. Luciano Fanti, 2017. "An Observable Delay Game with Unionised Managerial Firms," Scottish Journal of Political Economy, Scottish Economic Society, vol. 64(1), pages 50-69, February.
    15. Huck, Steffen & Muller, Wieland & Normann, Hans-Theo, 2004. "Strategic delegation in experimental markets," International Journal of Industrial Organization, Elsevier, vol. 22(4), pages 561-574, April.
    16. Nakamura, Yasuhiko, 2019. "Combining the endogenous choice of the timing of setting incentive parameters and the contents of strategic contracts in a managerial mixed duopoly," International Review of Economics & Finance, Elsevier, vol. 59(C), pages 207-233.
    17. Rupayan Pal, 2012. "Delegation And Emission Tax In A Differentiated Oligopoly," Manchester School, University of Manchester, vol. 80(6), pages 650-670, December.
    18. Fershtman, Chaim & Kalai, Ehud, 1997. "Unobserved Delegation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(4), pages 763-774, November.
    19. Iván Barreda-Tarrazona & Nikolaos Georgantzís & Constantine Manasakis & Evangelos Mitrokostas & Emmanuel Petrakis, 2012. "Managerial compensation contracts in quantity-setting duopoly," Working Papers 2012/17, Economics Department, Universitat Jaume I, Castellón (Spain).
    20. Cuihong Fan & Byoung Heon Jun & Elmar G. Wolfstetter, 2019. "Induced Price Leadership and (Counter-)Spying Rivals' Play under Incomplete Information," CESifo Working Paper Series 7476, CESifo.

    More about this item

    Keywords

    Essential input; Independent downstream producer; Quantity competition; Managerial delegation; Vertically-integrated producer;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:reecde:v:27:y:2023:i:1:d:10.1007_s10058-021-00274-3. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.