Cost pass-through under delegation
AbstractThe 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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Bibliographic InfoPaper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 404.
Date of creation: 01 Oct 2008
Date of revision:
Cost Pass-Through; Excise Taxation; Executive Compensation; Market Share; Strategic Delegation;
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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