Strategic delegation in successive oligopolies with differentiated firms

Abstract

A robust result in the literature on strategic incentives is that under quantity competition firm owners induce their managers to make more aggressive quantity choices in the product market than under profit maximization. We use a standard framework of successive oligopolies with differentiated products to show that depending on the degree of product substitution, the number of upstream suppliers, and the number of downstream rivals, owners might prefer to punish their manager for additional sales, i.e. to induce them to act soft instead of tough in the product market. We also consider price competition and find that firm and supplier profits can be higher if managers choose prices rather than quantities. Consumer surplus and total welfare are always higher under price competition.