Managerial delegation and welfare effects of cost reductions

Abstract

We extend the literature on the welfare effects of cost reductions by developing strategic delegation Cournot oligopoly games with $$n$$ firms, linear cost and demand functions, and sales bonuses. Our method generalizes Zhao (Int J Ind Organ 19:455–469, 2001), and expresses the results in terms of the effects of both small and large cost reductions. We find that the firm exit region with sales delegation is larger than in the classical Cournot duopoly benchmark case. We prove that the likelihood of a welfare loss after a cost reduction by an inefficient firm is higher with sales delegation. We show that repairing the welfare loss from such a cost reduction for any $$n > 2$$ requires firm exit.