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An analysis of managerial delegation in a market with vertically-integrated producer owning an essential input monopolistically

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  • Chung-Hui Chou

    (I-Shou University)

Abstract

This paper analyzes managerial delegation in a market with a vertically-integrated producer (VIP) which owns an essential input for retail goods production monopolistically and an independent downstream producer (IDP) which is capable of producing retail goods more efficiently than the VIP. Our research obtains the following results which sharply contrast to those presented in the existing literature. First, we discover that both VIP and IDP owners place a weight larger than $$1$$ 1 on profit levels in the incentive schemes which induces managers to act less aggressively in quantity competition, but encourages VIP manager to act more aggressively in pricing of essential inputs. As a consequence, managerial delegation reduces output levels of the retail goods in spite of a lower price of essential inputs. Second, VIP owner regards the weights on profit levels as strategic substitutes, whereas IDP owner regards them as strategic complements. Third, even though the VIP owns an essential input monopolistically, it has an incentive to reduce marginal costs of retail goods production. Furthermore, the VIP may be more-motivated to invest in cost-reducing research and development (R&D) in retail goods production than the IDP when the scale of retail goods market is sufficiently large. From the above reasoning, managerial delegation tends to reduce consumers’ surplus and social welfare in the short-run; however, it may yield more reductions in marginal costs of retail goods production resulting from cost-reducing R&D and improves consumers’ surplus and social welfare in the long-run when marginal costs of the essential input are sufficiently low under which the IDP may coexist with VIP in the retail goods market.

Suggested Citation

  • Chung-Hui Chou, 2023. "An analysis of managerial delegation in a market with vertically-integrated producer owning an essential input monopolistically," Review of Economic Design, Springer;Society for Economic Design, vol. 27(1), pages 247-265, February.
    • Handle: RePEc:spr:reecde:v:27:y:2023:i:1:d:10.1007_s10058-021-00274-3
    DOI: 10.1007/s10058-021-00274-3
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    More about this item

    Keywords

    Essential input; Independent downstream producer; Quantity competition; Managerial delegation; Vertically-integrated producer;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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