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Cost pass-through under delegation

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Author Info
Robert A. Ritz
Abstract

The rate of cost pass-through exceeds 50% under strategic delegation of decision-making to managers with sales revenue contracts - regardless of the number of firms in the industry and demand curvature. This contrasts sharply with profit-maximization, for which cost pass-through can take on any positive value. The key intuition is that firms under delegation act as if they faced more rivals than they actually do, thus pushing cost pass-through towards 100%. Cost pass-through with market share contracts is similarly bounded below, and this note also generalizes existing results on equilibrium characterization for this case.

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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 404.

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Date of creation: 2008
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Handle: RePEc:oxf:wpaper:404

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Related research
Keywords: Cost Pass-Through; Excise Taxation; Executive Compensation; Market Share; Strategic Delegation;

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Find related papers by JEL classification:
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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    Other versions:
  15. Fershtman, Chaim & Judd, Kenneth L, 1987. "Equilibrium Incentives in Oligopoly," American Economic Review, American Economic Association, vol. 77(5), pages 927-40, December. [Downloadable!] (restricted)
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