Vertical product differentiation, managerial delegation and social welfare in a vertically-related market

Abstract

In this paper, we analyze the influence of the delegation of downstream firms that produce different quality of products on the profits, consumer surplus and social welfare in a vertically related market. We find that whether it is price or quantity competition, the delegation can enable the downstream firms to grab the profits from their input suppliers. A downstream firm that produces a high-quality product earns more from suppliers than that producing a low-quality product; however, the delegation of downstream firms brings about the reduction of consumer surplus and social welfare. Further analysis has revealed that delegation adopted by downstream firms reverses their profit comparisons under different competitive modes; that is, the downstream firms produce higher profits under quantity competition without delegation while possessing higher profits under price competition with delegation.