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Managerial Delegation of Competing Vertical Chains with Vertical Externality

  • Kangsik Choi ORCID logo , Ki-Dong Lee and Seonyoung Lim EMAIL logo

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.

JEL Classification: D43; L13; M21

Appendix

A Appendix

πiddCπiddB=d2Θ121+dΔ248+8d16d2d3+d42Δ2<0ifd<d=0.96368,
uiddCuiddB=(ac)2d24d2Θ221d48+8d16d2d3+d42Δ2<0,
πiddBπinnB=ac1d2d23232d2+7d4Θ32d221+d4d2d22Δ2>0,
πiddCπinnC=3216d2+d4192+192d64d256d3+14d4+4d5d624d22+d248+8d16d2d3+d42>0,
uiddBuinnB=(ac)21d22+d2d23232d2+7d4Θ42d1+d4d2d22Δ2<0,
uiddCuinnC=(ac)22d3216d2+d4160+32d48d24d3+3d44d22+d48+8d16d2d3+d42<0,
SWnnCSWddC=(ac)23216d2+d4608+128d304d244d3+45d4+3d52d64d22+d248+8d16d2d3+d42>0,
SWnnBSWddB=ac)21d2(2d23232d2+7d4Θ52d21+d4d2d22Δ2>0,

where

Θ1=11796481179648d3670016d2+3629056d3+4784128d44664320d53432192d6+3289472d7+1495488d81405968d9408876d10+378136d11+70330d1263930d137191d14+6521d15+388d16360d178d188d19,
Θ2=98304131072d270336d2+376832d3+300544d4440832d5178048d6+274944d7+63360d8101256d914518d10+22902d11+2189d123155d13200d14+244d15+8d168d17,
Θ3=192192d320d2+328d3+178d4184d546d6+44d7+5d84d9.
Θ4=160128d224d2+172d3+93d467d512d6+8d7,
Θ5=1216960d2016d2+1544d3+1158d4852d5279d6+196d7+24d816d9.

Acknowledgements

We are especially indebted to the editor, Jan Wenzelburger for his constructive suggestions to improve the paper, as well as to two anonymous referees for their valuable comments. An earlier version of this paper was presented at the meeting of Japan Association for Applied Economics in 2019. We benefited from discussant Kosuke Hirose and participants for their valuable comments as well as Yoshihiro Tomaru.

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Published Online: 2020-02-01

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