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Cost-Saving production technologies and strategic delegation

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  • Bárcena Ruiz, Juan Carlos
  • Olaizola Ortega, María Norma

Abstract

This work analyzes a managerial delegation model in which firms that produce a differentiated good can choose between two production technologies: a low marginal cost technology and a high marginal cost technology. For the former to be adopted more investment is needed than for the latter. By giving managers of firms an incentive scheme based on a linear combination of profit and sales revenue, we find that Bertrand competition provides a stronger incentive to adopt the cost-saving technology than the strict profit maximization case. However, the results may be reversed under Cournot competition. We show that if the degree of product substitutability is sufficiently low (high), the incentive to adopt the cost-saving technology is larger under strict profit maximization (strategic delegation).

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Bibliographic Info

Paper provided by Universidad del País Vasco - Departamento de Fundamentos del Análisis Económico I in its series IKERLANAK with number 2004-12.

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Date of creation: Feb 2004
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Handle: RePEc:ehu:ikerla:200412

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Postal: Dpto. de Fundamentos del Análisis Económico I, Facultad de CC. Económicas y Empresariales, Universidad del País Vasco, Avda. Lehendakari Aguirre 83, 48015 Bilbao, Spain
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Keywords: strategic delegation; duopoly; cost saving production technologies;

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Cited by:
  1. Bárcena-Ruiz, Juan Carlos & Olaizola, Norma, 2008. "Choice of flexible production technologies under strategic delegation," Japan and the World Economy, Elsevier, vol. 20(3), pages 395-414, August.
  2. Fanti, Luciano & Gori, Luca, 2011. "Cross-ownership and stability in a Cournot duopoly," MPRA Paper 34574, University Library of Munich, Germany.
  3. Luciano Fanti, 2011. "Cross-ownership and unions in a Cournot duopoly: when profits reduce with horizontal product differentiation," Discussion Papers 2011/128, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
  4. Luciano Fanti, 2011. "Welfare effects of cross-ownership in a unionised duopoly," Discussion Papers 2011/125, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
  5. Luciano Fanti, 2011. "Product differentiation and duopoly: when social welfare benefits from cross-shareholding," Discussion Papers 2011/129, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.

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