Incentive pay and rent in oligopoly

Abstract

Our purpose is to examine strategic delegation in nonlinear Cournot oligopoly. The findings generalize earlier results and show that managerial contracts reward sales under the condition of a fixed input price. Alternatively, under a variable input price, owners might punish sales even when goods are strategic substitutes. We conclude that optimal strategic motivation depends critically on the input price. For example, motivation that supports positive owner profit under a fixed input price nullifies owner‐profit if an upstream monopolist with convex costs sets the input price. In a vertical relationship between a duopoly and an upstream monopolist, strategic delegation punishes sales.