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Cost pass-through under delegation

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  • 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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  • Robert A. Ritz, 2008. "Cost pass-through under delegation," Economics Series Working Papers 404, University of Oxford, Department of Economics.
  • Handle: RePEc:oxf:wpaper:404
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    File URL: http://www.economics.ox.ac.uk/materials/working_papers/paper404.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Cost Pass-Through; Excise Taxation; Executive Compensation; Market Share; Strategic Delegation;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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