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Managerial delegation and welfare effects of cost reductions

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  • Thijs Jansen
  • Arie Lier
  • Arjen Witteloostuijn

Abstract

We extend the literature on the welfare effects of cost reductions by developing strategic delegation Cournot oligopoly games with $$n$$ n firms, linear cost and demand functions, and sales bonuses. Our method generalizes Zhao (Int J Ind Organ 19:455–469, 2001 ), and expresses the results in terms of the effects of both small and large cost reductions. We find that the firm exit region with sales delegation is larger than in the classical Cournot duopoly benchmark case. We prove that the likelihood of a welfare loss after a cost reduction by an inefficient firm is higher with sales delegation. We show that repairing the welfare loss from such a cost reduction for any $$n > 2$$ n > 2 requires firm exit. Copyright Springer-Verlag Wien 2015

Suggested Citation

  • Thijs Jansen & Arie Lier & Arjen Witteloostuijn, 2015. "Managerial delegation and welfare effects of cost reductions," Journal of Economics, Springer, vol. 116(1), pages 1-23, September.
    • Handle: RePEc:kap:jeczfn:v:116:y:2015:i:1:p:1-23
    DOI: 10.1007/s00712-014-0428-y
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    References listed on IDEAS

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    1. Zhao, Jingang, 2001. "A characterization for the negative welfare effects of cost reduction in Cournot oligopoly," International Journal of Industrial Organization, Elsevier, vol. 19(3-4), pages 455-469, March.
    2. Donald Smythe & Jingang Zhao, 2006. "The Complete Welfare Effects of Cost Reductions in a Cournot Oligopoly," Journal of Economics, Springer, vol. 87(2), pages 181-193, March.
    3. Fershtman, Chaim & Judd, Kenneth L, 1987. "Equilibrium Incentives in Oligopoly," American Economic Review, American Economic Association, vol. 77(5), pages 927-940, December.
    4. Kimmel, Sheldon, 1992. "Effects of Cost Changes on Oligopolists' Profits," Journal of Industrial Economics, Wiley Blackwell, vol. 40(4), pages 441-449, December.
    5. Steven D. Sklivas, 1987. "The Strategic Choice of Managerial Incentives," RAND Journal of Economics, The RAND Corporation, vol. 18(3), pages 452-458, Autumn.
    6. Ritz, Robert A., 2008. "Strategic incentives for market share," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 586-597, March.
    7. Nolan Miller & Amit Pazgal, 2002. "Relative performance as a strategic commitment mechanism," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 23(2), pages 51-68.
    8. Jansen, Thijs & van Lier, Arie & van Witteloostuijn, Arjen, 2007. "A note on strategic delegation: The market share case," International Journal of Industrial Organization, Elsevier, vol. 25(3), pages 531-539, June.
    9. Gaudet, Gerard & Salant, Stephen W, 1991. "Increasing the Profits of a Subset of Firms in Oligopoly Models with Strategic Substitutes," American Economic Review, American Economic Association, vol. 81(3), pages 658-665, June.
    10. Vickers, John, 1985. "Delegation and the Theory of the Firm," Economic Journal, Royal Economic Society, vol. 95(380a), pages 138-147, Supplemen.
    11. Wang, X. Henry & Zhao, Jingang, 2007. "Welfare reductions from small cost reductions in differentiated oligopoly," International Journal of Industrial Organization, Elsevier, vol. 25(1), pages 173-185, February.
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    Cited by:

    1. Zhu, Yan-lan & Zhou, Wei & Chu, Tong, 2022. "Analysis of complex dynamical behavior in a mixed duopoly model with heterogeneous goods," Chaos, Solitons & Fractals, Elsevier, vol. 159(C).

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    More about this item

    Keywords

    Managerial incentives; Cost reduction; Cournot oligopoly; Welfare effects; C72; D21; D43; L13;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • 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

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