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Intrafirm Conflicts and Interfirm Price Competition

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Author Info

  • Werner Güth

    ()
    (Max Planck Institute of Economics, Strategic Interaction Group)

  • Kerstin Pull

    ()
    (University of Tübingen, Department of Economics and Business Administration)

  • Manfred Stadler

    ()
    (University of Tübingen, Department of Economics and Business Administration)

Abstract

We study interfirm price competition in the presence of horizontal and vertical intrafirm conflicts in each firm. Intrafirm conflicts are captured by a principal-agent framework with firms employing more than one agent and implementing a tournament incentive scheme. The principals offer premium incentives in the sense of revenue shares to which agents react by proposing a sales price. Introducing such intrafirm conflicts results in higher prices and lower effort levels. Increasing the number of agents lowers the optimal surplus share of the agents as well as the individual effort and the sales prices. Firm profits first increase and then decrease when employing more and more agents suggesting that principals should employ an intermediate number of agents.

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Bibliographic Info

Paper provided by Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics in its series Jena Economic Research Papers with number 2011-042.

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Date of creation: 05 Oct 2011
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Handle: RePEc:jrp:jrpwrp:2011-042

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Keywords: Price competition; Agency theory;

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  1. Jensen, M.C. & Murphy, K.J., 1988. "Performance Pay And Top Management Incentives," Papers 88-04, Rochester, Business - Managerial Economics Research Center.
  2. Matthias Kräkel, 2005. "Strategic delegation in oligopolistic tournaments," Review of Economic Design, Springer, vol. 9(4), pages 377-396, December.
  3. Geoffrey Brennan & Werner Güth & Hartmut Kliemt, 2004. "Approximate Truth in Economic Modelling," Papers on Strategic Interaction 2004-38, Max Planck Institute of Economics, Strategic Interaction Group.
  4. Fershtman, Chaim, 1985. "Managerial incentives as a strategic variable in duopolistic environment," International Journal of Industrial Organization, Elsevier, vol. 3(2), pages 245-253, June.
  5. Chaim Fershtman & Kenneth L Judd, 1984. "Equilibrium Incentives in Oligopoly," Discussion Papers 642, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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