Profitable Strategic Delegation with Conjectural Variations

Aitor Ciarreta, Javier Garcia-Enriquez
Bulletin of Economic Research 00:0, 2017, 0307-3378

Firms delegate strategic decisions to managers because they find it profitable to do so. In the product market, when agents make conjectures about the reaction of their rivals to marginal changes in their own strategies, the set of equilibriums can be enlarged with respect to the case of no conjectures. This paper takes a duopolistic linear market parameterization where firms selling differentiated products can delegate either price or output decisions to managers. We show that it is a dominant strategy for firms to delegate no matter whether firms are Cournot or Bertrand competitors, although the equilibrium is not necessarily efficient. Futhermore, in equilibrium Cournot competition is more profitable for firms than Bertrand competition. Finally, requiring consistency in conjectures yields
the same outcome no matter what type of strategic interaction and managerial choice there is on the part of firms.

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