Abstract
We study price competition in heterogeneous markets where price decisions are delegated to agents. Principals implement a revenue sharing scheme to which agents react by commonly charging a sales price. The results of our model exemplify the importance of both intra- and interfirm interactions of principals and agents in competition. We show that price delegation can increase or decrease the firms’ surplus depending on the heterogeneity of the market and the number of agents employed by the firms.
Highlights
We study price competition in heterogeneous markets where price decisions are delegated to agents
We show that price delegation can increase or decrease the firms’ surplus depending on the heterogeneity of the market and the number of agents employed by the firms
Whereas principal-agent theory typically restricts itself to the analysis of intrafirm interaction by neglecting interfirm competition, most models in the theory of Industrial Organization (IO) focus purely on interfirm competition by assuming a unitary decision maker for each of the competing firms
Summary
Whereas principal-agent theory typically restricts itself to the analysis of intrafirm interaction by neglecting interfirm competition, most models in the theory of Industrial Organization (IO) focus purely on interfirm competition by assuming a unitary decision maker for each of the competing firms. Our analysis is related to the strategic delegation analysis of Vickers [2], Fershtman [3], Fershtman and Judd [4], Sklivas [5], Caillaud, Jullien, and Picard [6] and Schmidt [7] who study intrafirm incentives for managers facing a market with interfirm quantity or price competition In these delegation games, the profit-maximizing principals (the owners) implement an incentive scheme for their agents (the managers) based on a weighted difference of revenue and cost. Kräkel [10] investigates tournament-like interfirm competition based on a principal-(one) agent framework These models have in common that they restrict analysis to the delegation to manager agents who decide on prices or quantities but are not involved in production, i.e. they face no cost of producing.
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