Strategic Delegation in Successive Oligopolies with Differentiated Firms

Abstract

A robust result in the literature on strategic incentives pioneered by Fershtman and Judd (1987), Sklivas (1987), and Vickers (1985) is that under quantity competition firm owners induce their managers to make aggressive quantity choices in the product market. We revisit this result in a standard framework of successive oligopolies with differentiated products. We show that depending on the degree of product substitution, the number of upstream suppliers, and the number of downstream rivals, owners might prefer managerial incentives to be either profit-based or punish their manager for additional sales, i.e. induce them to act soft instead of tough. We further show that firm and supplier profits can be higher under price competition than under quantity competition, but that consumer surplus and total welfare are always higher under price competition.