Who is more aggressive under vertical product differentiation?

Abstract

In this paper, we introduce quality differences in vertical market and compare the managerial delegation contracts of downstream firms. We find that the owner of a downstream firm that produces low‐quality products induces the manager to behave more aggressively when the marginal cost coefficient is low. While when marginal cost coefficient is high, the owner of a downstream firm that produces high‐quality products induces the manager to behave more aggressively. It is further found that managerial delegation can improve the profits of downstream firms but reduce the consumer surplus and social welfare.

The impact of technology transfer on managerial delegation under vertical product differentiation

“…Without loss of generality, it is assumed that the quality of product produced by firm 1is lower than firm 2, that is, , where denotes the difference in product quality. Similar to Wang (2023a), we assume that consumers are uniformly distributed on the line , and consumers have different preferences for product quality depending on their location. When a consumer at purchases product produced by firm , the consumer's utility function is , where represents the product price.…”

“…In general, managerial delegation contracts will reduce firm profits, thus making firms fall into a prisoner's dilemma (Colombo, 2022; Fershtman & Judd, 1987). Under the vertical market structure, Wang (2023a) found that managerial delegation can increase downstream firm profits. Existing literatures have analyzed the effect of production costs (Fanti & Meccheri, 2017; Hamamura & Ramani, 2023), horizontal shareholding (Nakamura, 2011), overinvestment (Pal, 2010), R&D spillover (Kräkel, 2004), corporate social responsibility (Fanti & Buccella, 2019), product quality (Wang & Wang, 2021), and market competition (Nakamura, 2017) on managerial delegation contracts.…”