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Managerial delegation under capacity commitment: A tale of two sources

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  • Colombo, Stefano
  • Scrimitore, Marcella

Abstract

The paper discusses the role of delegation to managers in a duopoly in which the optimal decisions upon in-house production and outsourcing may lead make and buy to coexist, namely bi-sourcing to arise at equilibrium. In the benchmark framework of quantity competition, outsourcing to an inefficient external manufacturing is shown to be strategically used under bi-sourcing with the aim to exploit market advantages induced by delegation. Strategic reasons for adopting either outsourcing or in-house production, besides leading firm's profits to increase in the cost of internal or external production, let delegation not be the optimal (unique) endogenous choice, which contrasts with previous studies. It may also cause, under sufficiently high product differentiation, a reversal of the advantage of the delegating (first-mover) firm over the non-delegating (second-mover) rival.

Suggested Citation

  • Colombo, Stefano & Scrimitore, Marcella, 2018. "Managerial delegation under capacity commitment: A tale of two sources," Journal of Economic Behavior & Organization, Elsevier, vol. 150(C), pages 149-161.
  • Handle: RePEc:eee:jeborg:v:150:y:2018:i:c:p:149-161
    DOI: 10.1016/j.jebo.2018.03.024
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    References listed on IDEAS

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    Keywords

    Duopoly; Outsourcing; Capacity commitment; Strategic delegation;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm

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