Journal of Economics

, Volume 116, Issue 1, pp 1–23 | Cite as

Managerial delegation and welfare effects of cost reductions

  • Thijs Jansen
  • Arie van Lier
  • Arjen van Witteloostuijn
Article
  • 262 Downloads

Abstract

We extend the literature on the welfare effects of cost reductions by developing strategic delegation Cournot oligopoly games with \(n\) firms, linear cost and demand functions, and sales bonuses. Our method generalizes Zhao (Int J Ind Organ 19:455–469, 2001), and expresses the results in terms of the effects of both small and large cost reductions. We find that the firm exit region with sales delegation is larger than in the classical Cournot duopoly benchmark case. We prove that the likelihood of a welfare loss after a cost reduction by an inefficient firm is higher with sales delegation. We show that repairing the welfare loss from such a cost reduction for any \(n > 2\) requires firm exit.

Keywords

Managerial incentives Cost reduction Cournot oligopoly  Welfare effects 

JEL Classification

C72 D21 D43 L13 

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Copyright information

© Springer-Verlag Wien 2014

Authors and Affiliations

  • Thijs Jansen
    • 1
  • Arie van Lier
    • 2
  • Arjen van Witteloostuijn
    • 2
    • 3
  1. 1.Department of Quantitative Economics, School of Business and EconomicsMaastricht UniversityMaastrichtThe Netherlands
  2. 2.Department of Organization and StrategyTilburg UniversityTilburgThe Netherlands
  3. 3.Antwerp Center of Evolutionary DemographyUniversity of AntwerpAntwerpBelgium

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