Competition and the Strategic Choice of Managerial Incentives: the Relative Performance Case

In this paper we study the role of market competitiveness in a strategic delegation game in which owners delegate output decisions to managers interested in the firm's relative performance. In particular we study how the optimal delegation scheme - i.e. the distortion from pure profit maximization - is affected by market concentration and the elasticity of market demand. We show that these two indexes of market competitiveness do not alter managerial incentives in the same way: while the optimal degree of delegation decreases as the market becomes less concentrated, it increases as demand becomes more elastic.Strategic delegation, relative performance, oligopoly, isoelastic demand

Strategic delegation and market competitiveness

Within a strategic delegation model, this paper examines in a quantity setting oligopoly framework the determinants of the degree of strategic delegation - the latter being defined as the extent of the departure from pure profit maximization. The sub-game perfect equilibrium degree of strategic delegation is derived as a function of the two key parameters which determine market competitiveness in a homogeneous product set-up, i.e., the price-elasticity of market demand and the number of firms. With respect to both these parameters we find that their relationship with the degree of delegation is not necessarily monotone. Indeed, for an increase in elasticity or a reduction in market concentration to reduce strategic delegation, these determinants of the Lerner index of monopoly power must satisfy restrictions which guarantee that the initial market environment is sufficiently competitive.Strategic delegation, quantity competition, constant price-elasticity of demand

The Price Index Effect and Macroeconomic Inefficiency

In the Dixit-Stiglitz model of monopolistic competition the effects of individual pricing decisions on the aggregate price index are neglected. Tliis paper studies the implications of this approximation in terms of the efficiency of macroeconomic equilibria. We show that allowing for the price-index effect, makes the degree of inefficiency positively correiated with the number of agents; it also reduces the scope for New Keynesian outcomes, such as price rigidity and multiple equilibria.New Keynesian economies, aggregate demand externalities, nominal rididity

Quantity Competition, Endogenous Motives and Behavioral Heterogeneity

The paper shows that strategic quantity competition can be characterized by behavioral heterogeneity, once competing firms are allowed in a pre-market stage to optimally choose the behavioral rule they will follow in their strategic choice of quantities. In particular, partitions of the population of identical firms in profit maximizers and relative profit maximizers turn out to be deviation-proof equilibria, both in simultaneous and sequential game structures. Our findings that in a strategic framework heterogeneous behavioral rules are consistent with individual incentives provides a game-theoretic microfoundation of heterogeneity.Behavioral Heterogeneity, Endogenous Motives, Relative Performance, Multistage Games, Quantity Competition.

Beyond the Uniform Distribution: Equilibrium Prices and Qualities in a Vertically Differentiated Duopoly

The paper proves the existence of a subgame perfect Nash equilibrium in a vertically differentiated duopoly with uncovered market, for a large set of symmetric and asymmetric distributions of consumers, including, among others, all logconcave distributions. The proof relies on the ’income share elasticity’ representation of the consumers’ density function, which ensures the analytical tractability of the firms’ optimality conditions at a high level of generality. Some illustrative examples of the solution are offered, in order to assess the impact of distributive shocks on the equilibrium market configuration