Sharing managerial contract information in a vertically related market

Abstract

Recent research shows that in duopolies with strategic delegation, firm owners have an incentive to always share information about managerial compensation contracts.We study how sharing of contract information is affected by the presence of a supplier. We find that under quantity competition, a partial information-sharing equilibrium may occur. Firms that share contract information punish their managers for sales to soften supplier pricing. Mandating information sharing increases total welfare but decreases consumer surplus. Under price competition, firms always want to share managerial contract information. Finally, firm profits can be higher under price competition than under quantity competition.

Information sharing in a Cournot–Bertrand duopoly

“…The price‐setting Manager 2 has to anticipate Manager 1's conjectured output reaction function but has to use a conjectured incentive weight . Like Baik and Lee (2020) and Kopel and Putz (2021), we assume that it is common knowledge that the managers are offered a linear compensation contract. Therefore, Firm 1's quantity‐setting manager conjectures that Firm 2's price‐setting manager maximizes .…”

“…11 In such a situation, mandating information sharing leads to an improvement in terms of consumer and overall welfare, but both firms are then worse off (see, similarly, Oh & Shiiba, 2020). 10 Qualitatively, this result is reminiscent of the observations reported in, for example, Kopel and Putz (2021) and in contributions employing an observable delay approach (see, e.g., Kopel & Löffler, 2012), where in equilibrium two symmetric firms might make asymmetric choices. However, note that in our Cournot-Bertrand setting firms are asymmetric because they compete in different strategic variables.…”

“…Hence, market structure does not matter in terms of the firms' preferred choice of information sharing. Kopel and Putz (2021) also consider a strategic delegation setting, but allow for differentiated products and introduce an external supplier which provides an input to both duopolists. They show that in a Cournot market (but not in a Bertrand market) the presence of the supplier changes the firms' incentives to share managerial contract information if product substitution is large: A partial information sharing equilibrium exists where one of the firms keeps its contract details secret.…”

“…Considering information sharing in oligopolies, our paper is closely related to Baik and Lee (2020) and Kopel and Putz (2021). Baik and Lee (2020) study firms' incentives to voluntarily share their manager's contract details in a quantity-setting or a price-setting duopoly.…”

“…Because no firm reveals its incentive weight, the quantity-setting Kopel and Putz (2021), we assume that it is common knowledge that the managers are offered a linear compensation contract. 7 Therefore, Firm 1's quantity-setting manager conjectures that Firm 2's price-…”