Biased managers in a vertical structure

This paper analyses the choice of managers' types in a vertical structure with a common input supplier. Depending on the degree of product differentiation, the choice of either an overconfident or an underconfident manager can arise whatever the downstream competition mode. Moreover, when competition is in quantities, the well-known prisoner’s dilemma result of strategic delegation does not apply when owners optimally delegate to underconfident managers. Instead, under price competition, a prisoner’s dilemma applies but only when the strategic decision is optimally delegated to overconfident managers. Moreover, the standard result that firms choose to compete in quantities is preserved when the degree of product substitutability is high, but a novel outcome with multiple asymmetric equilibria arises when the degree of product differentiation is low.