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Strategic delegation under fulfilled expectations

Author

Listed:
  • Lee, DongJoon
  • Choi, Kangsik
  • Han, Jae-Joon

Abstract

Fershtman and Judd (1987) show that profit-oriented owners delegate pricing decisions to managers through contracts that incentivize them to behave less aggressively. Hoernig (2012) extends their analysis to environments with network effects and finds that, when network effects are strong enough, the result is reversed and that optimal delegation contracts incentivize managers to behave more aggressively. This paper revisits Hoernig (2012) by assuming that consumers form expectations about network sizes before owners choose delegation contracts, in contrast with Hoernig’s (2012) assumption that expectations are formed after the contracts are chosen. That is, the current study employs fulfilled (or passive) expectations, while Hoernig (2012) uses rational (or responsive) expectations. We show that under the fulfilled expectations, Fershtman and Judd’s (1987) results hold, regardless of the strength of the network effect.

Suggested Citation

  • Lee, DongJoon & Choi, Kangsik & Han, Jae-Joon, 2018. "Strategic delegation under fulfilled expectations," Economics Letters, Elsevier, vol. 169(C), pages 80-82.
    • Handle: RePEc:eee:ecolet:v:169:y:2018:i:c:p:80-82
    DOI: 10.1016/j.econlet.2018.05.016
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    Citations

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    Cited by:

    1. Onur A. Koska, 2022. "Investing in Network Strength, Consumer Expectations, and the Mode of Competition," Working Papers in Economics 22/09, University of Canterbury, Department of Economics and Finance.
    2. DongJoon Lee & Kangsik Choi & Tatsuhiko Nariu, 2020. "Endogenous vertical structure with network externalities," Manchester School, University of Manchester, vol. 88(6), pages 827-846, December.
    3. Cong Pan & DongJoon Lee & Kangsik Choi, 2020. "Firms’ strategic delegation with heterogeneous consumers," Journal of Economics, Springer, vol. 131(3), pages 199-221, December.
    4. Kangsik Choi & DongJoon Lee & Ki‐Dong Lee, 2023. "Biased managers with network externalities," Scottish Journal of Political Economy, Scottish Economic Society, vol. 70(3), pages 201-216, July.
    5. Chung-Hui Chou, 2020. "Do Consumers Gain or Lose when Network Externalities Become Stronger?," Economics Bulletin, AccessEcon, vol. 40(3), pages 2193-2200.
    6. Yasuhiko Nakamura, 2021. "Price versus quantity in a duopoly with network externalities under active and passive expectations," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(1), pages 120-133, January.
    7. Henrik Vetter, 2020. "Incentive pay and rent in oligopoly," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 41(8), pages 1621-1628, December.
    8. Ryo Hashizume & Takeshi Ikeda & Tatsuhiko Nariu, 2021. "Price discrimination with network effects: different welfare results from identical demand functions," Economics Bulletin, AccessEcon, vol. 41(3), pages 1807-1812.

    More about this item

    Keywords

    Strategic delegation; Network effects; Fulfilled expectations;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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