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Cost pass-through under delegation

  • Robert A. Ritz
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    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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    File URL: http://www.economics.ox.ac.uk/materials/working_papers/paper404.pdf
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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: 01 Oct 2008
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    Handle: RePEc:oxf:wpaper:404
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