On the role of network externalities in strategic delegation contracts with an industry-wide union

ABSTRACT

This article analyses the role of network externalities in managerial delegation contracts for differentiated products when the marginal product costs (the wage) are set by an industry-wide union. The results show that, in both Bertrand and Cournot equilibria, each owner offers a profit-oriented incentive scheme to his or her managers by penalizing sales maximization, irrespective of the strength of the network externalities. In the presence of weak network externalities and low product differentiation, firms can obtain higher profits in the equilibrium under Cournot-type quantity competition compared with that under Bertrand-type price competition. Furthermore, the wage chosen by the union is higher in the Cournot than in the Bertrand equilibrium. In the Cournot equilibrium, the wage increases with the strength of the network externalities. However, in the Bertrand equilibrium, there exists a threshold level of the degree of product differentiation.

KEYWORDS:

• Strategic delegation
• network externalities
• industry-wide union
• price competition
• quantity competition

JEL CLASSIFICATION:

• D43
• L20

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Corrigendum

Acknowledgement

I thank David Peel (editor) and anonymous referees for their insights and comments. Their valuable comments greatly improve the article. The work was supported by the National Natural Science Foundation of China (NO.71471051)

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ The prisoner’s dilemma is a typical example of a non-cooperative game. It reveals the contradiction between individual rationality and collective rationality. That is, the individual rationality of each participant may bring less benefit than the collective rationality brings to each participant.

² Wang Huimin. Try to build a harmonious labor relationship – Zhejiang labor union become the main force of social harmony [N]. People’s Daily, 2011-05-04 (02).

³ Recently, there have been some attempts to introduce industry-wide union utility into a product market model. Thus, Mukherjee (2010) explored the effects of product market cooperation in the presence of an industry-wide union. Buccella (2014) analysed product market competition with differentiated goods using a conjectural variation model. Meccheri and Fanti (2014) investigated how sales delegation contracts in a duopoly product market interact with the wage decisions made by an industry-wide union. It is worth noting that Meccheri and Fanti (2014) assumed that the owners provide an incentive contract that is a linear combination of profit and sales quantity to their managers. This approach is different from the VFJS model.

⁴ Because when , is increasing with , , which means that and .

⁵ The higher is, the lower the product differentiation in the market will be.