Biased Managers as Strategic Commitment in a Mixed Duopoly

Yasuhiko Nakamura

doi:10.4236/tel.2014.49112

Abstract

This paper analyzes a model in which both the owner of a social welfare-maximizing public firm and the owner of an absolute profit-maximizing private firm can hire biased managers for strategic reasons in a mixed duopoly in the contexts of both a price competition and a quantity competition. In this paper, in a mixed duopoly, we show that in the contexts of both a price competition and a quantity competition, the owners of both firms employ more aggressive managers. In particular, in the result obtained in the price competition, the attitude of the manager employed by the owner of the private firm reverses to that obtained in the case of classical strategic delegation works.

Highlights

As shown in Kaplan et al [1], a candidate’s aggressiveness seems to be an important characteristic in the hiring choice for CEO positions within firms
In the context of a standard mixed duopoly composed of one social welfare-maximizing public firm and one absolute profit-maximizing firm, the aim of this paper is to provide a theoretical explanation for the fact that in the real world economy, each firm’s owner tends to systematically hire a manager who is relatively aggressive through strategic managerial delegation
This paper explored the situation wherein it was possible for each firm’s owner to hire a biased manager in a mixed duopoly composed of one social welfare-maximizing public firm and one absolute profit-maximizing private firm in the contexts of both a price competition and a quantity competition

Summary

Introduction

As shown in Kaplan et al [1], a candidate’s aggressiveness seems to be an important characteristic in the hiring choice for CEO positions within firms. In the context of a standard mixed duopoly composed of one social welfare-maximizing public firm and one absolute profit-maximizing firm, the aim of this paper is to provide a theoretical explanation for the fact that in the real world economy, each firm’s owner tends to systematically hire a manager who is relatively aggressive through strategic managerial delegation. Departing from the classical approach introduced in Fershtman and Judd [11], Sklivas [12], and Vickers [13], to explain each firm’s manager’s potentially biased expectation on market profitability, in this paper, we apply the approach presented by Englmaier and Reisinger [3] to the context of a mixed duopoly composed of one public firm and one private firm. In the mixed duopoly, we show that in both the price competition and quantity competition, the owners of both the public firm and private firm employ more aggressive managers than in the case of absolute profit-maximizers.

Price-Setting Competition

Quantity-Setting Competition

Concluding Remarks