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Welfare-reducing price competition under relative performance delegation with convex costs

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  • Xu, Lili
  • Matsumura, Toshihiro

Abstract

Price competition is thought to be more intense than quantity competition in oligopolies. By introducing strategic delegation contracts, this study challenges this belief. We consider management reward contracts based on relative performance, which is observed globally. We show that if marginal costs are increasing, quantity competition yields lower prices, smaller profits, and greater welfare than price competition. Then, we endogenize the mode of competition and find that both price and quantity competition can exist in equilibrium. Finally, we extend our analysis to include a mixed duopoly wherein a state-owned public firm competes with a private firm. We determine that the welfare-inferior outcome (price competition) appears in the unique equilibrium. Our findings suggest that price competition does not necessarily imply stricter competition among firms in either private or mixed oligopolies, which is important from an antitrust perspective. They also imply that coordination among firms regarding the mode of competition (contract form) may be harmful to society and should be monitored by antitrust agencies.

Suggested Citation

  • Xu, Lili & Matsumura, Toshihiro, 2022. "Welfare-reducing price competition under relative performance delegation with convex costs," Economic Modelling, Elsevier, vol. 112(C).
    • Handle: RePEc:eee:ecmode:v:112:y:2022:i:c:s0264999322001171
    DOI: 10.1016/j.econmod.2022.105871
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    Cited by:

    1. Jumpei Hamamura & Vinay Ramani, 2023. "Social performance versus relative performance evaluation, asymmetric costs, and quantity competition under managerial delegation," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(3), pages 1706-1719, April.
    2. Hirose, Kosuke & Matsumura, Toshihiro, 2022. "Common ownership and environmental Corporate Social Responsibility," Energy Economics, Elsevier, vol. 114(C).
    3. Xu, Lili & Matsumura, Toshihiro, 2023. "Market transparency in a mixed oligopoly," MPRA Paper 118415, University Library of Munich, Germany.
    4. Xu, Lili & Zhang, Yidan & Matsumura, Toshihiro, 2022. "Cournot–Bertrand comparison under common ownership in a mixed oligopoly," MPRA Paper 114644, University Library of Munich, Germany.
    5. Lili Xu & Yidan Zhang & Toshihiro Matsumura, 2023. "Competition mode and common ownership in a mixed oligopoly," Manchester School, University of Manchester, vol. 91(4), pages 306-319, July.

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    More about this item

    Keywords

    Payoff interdependency; Strategic delegation; Cournot model; Bertrand model; Endogenous competition mode; Coordination failure;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm

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