Journal of Economics

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

Managerial delegation and welfare effects of cost reductions

  • Thijs JansenEmail author
  • Arie van Lier
  • Arjen van Witteloostuijn


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.


Managerial incentives Cost reduction Cournot oligopoly  Welfare effects 

JEL Classification

C72 D21 D43 L13 


  1. Fershtman C, Judd KL (1987) Equilibrium incentives in oligopoly. Am Econ Rev 77:927–940Google Scholar
  2. Gaudet G, Salant S (1991) Increasing the profits of a subset of firms in oligopoly models with strategic substitutes. Am Econ Rev 81:658–665Google Scholar
  3. Jansen M, van Lier A, van Witteloostuijn A (2007) A note on strategic delegation: the market share case. Int J Ind Organ 25:531–539CrossRefGoogle Scholar
  4. Kimmel S (1992) Effects of cost changes on oligopolists’ profits. J Ind Econ 40:441–449CrossRefGoogle Scholar
  5. Miller N, Pazgal A (2002) Relative performance as a strategic commitment mechanism. Manag Decis Econ 23:51–68CrossRefGoogle Scholar
  6. Ritz R (2008) Strategic incentives for market share. Int J Ind Organ 26:586–597CrossRefGoogle Scholar
  7. Sklivas SD (1987) The strategic choice of managerial incentives. RAND J Econ 18:452–458CrossRefGoogle Scholar
  8. Schmalensee R (1976) Is more competition necessarily good? Ind Organ Rev 4:120–121Google Scholar
  9. Smythe DJ, Zhao J (2006) The complete welfare effects of cost reductions in a Cournot oligopoly. J Econ 87:181–193CrossRefGoogle Scholar
  10. Vickers J (1985) Delegation and the theory of the firm. Econ J 95:138–147CrossRefGoogle Scholar
  11. Zhao J (2001) A characterization for the negative welfare effects of cost reduction in Cournot oligopoly. Int J Ind Organ 19:455–469CrossRefGoogle Scholar
  12. Wang XH, Zhao J (2007) Welfare reductions from small cost reductions in differentiated oligopoly. Int J Ind Organ 25:173–185CrossRefGoogle Scholar

Copyright information

© Springer-Verlag Wien 2014

Authors and Affiliations

  • Thijs Jansen
    • 1
    Email author
  • 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

Personalised recommendations