Strategic delegation under rational and fulfilled expectations in quantity competition

ABSTRACT

In an asymmetric duopoly with quantity competition such that consumers form expectations about network sizes before and after the owners of both firms choose their incentive parameters (fulfilled and rational expectations, respectively), this paper reconsidered the level of their incentive parameters adopting the approach emplyed in two important existing works in this field. In quantity competition, we demonstrate that in such an asymmetric duopoly, the owners of both firms make their managers more aggressive than their sole profit maximizers, regardless of the strength of network effects.

KEYWORDS:

• Strategic delegation
• network effects
• fulfilled expectations
• rational expectation
• quantity competition

JEL CLASSIFICATION:

• D43
• L13
• L14

Acknowledgments

We are grateful for the financial support KAKENHI (16K03665). Any remaining errors are our own.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ More recently, Miller and Pazgal (2001) and Miller and Pazgal (2002) investigated the situation in which the weighted sum of the firm’s profit and those of its rivals with respect to its incentive parameter is used as the managerial delegation contracts within firms (the relative performance delegation)and Ritz (2008) explored the case in which the manager's objective function is a weighted sum of the firm’s profit and its market share (the market share delegation). Berr (2011) and Manasakis, Mitrokostas, and Petrakis (2010) considered the endogenous selection problem regarding the type of delegation contract by each firm’s owner among the sole profit maximizer, and the sales, relative performance, and market share delegations.

² Chirco and Scrimitore (2013) endogenized the choice of the strategy variable (price or quantity) by each firm’s owner in the presence of network effects à la Hoernig (2012). Furthermore, Pal (2015) explained that relative performance-delegation-based strategic managerial delegation does not lead to the equivalence of Bertrand and Cournot equilibria in the presence of network externalities, regardless of the strength and type of network externalities, either positive or negative, in the same way as in Hoernig (2012). Fanti and Buccella (2016) investigated the bargaining agenda selection in a unionized duopoly with network effects following Hoernig (2012).

³ Hurkens and López (2014) examined the mobile termination under the condition that the rational expectation is denoted as the ‘responsive’ expectation while the fulfilled expectation is denoted as the ‘passive’ expectation.

⁴ In the context of price competition, Nakamura (2019) dealt with the same approach as that used in this paper.

Additional information

Funding

This work was supported by the Japan Society for the Promotion of Science [16K03665].