Delivered pricing and endogenous delegation of contract type

Abstract

AbstractThis article demonstrates for the first time that owners will delegate the location decision under delivered pricing using a relative performance contract rather than a market share contract. It goes on to evaluate the welfare consequences of this demonstration. With linear production costs and simultaneous location, both incentive contracts reduce welfare, but the chosen relative performance contract reduces it by less. Yet, with linear costs and sequential location, the chosen relative performance contract reduces welfare by more. Finally, with enough convexity in production costs, welfare can be improved by the chosen relative performance contracts.