Strategic Delegation in Asymmetric Cost Duopolies: An Experimental Study
Chineze E. Christopher, PhD student, Purdue University
This project studies delegation and cost asymmetry in two-seller markets. The research asks: if owners optionally delegate production levels to managers, do they produce at the predicted level? This research aims to provide an experimental test on whether and how the strategic use of managers and managerial incentives influences rivalry among firms under asymmetric cost. In such a market, strategic delegation improves welfare but reduces the market power of the efficient firm—the efficient firm produces a larger fraction of demand at lower prices. However, since the efficient firm can profitably alter the payoffs to a greater extent than the inefficient firm can, it becomes dominant and its decision to delegate can be interpreted as exercising its market power. Results from this study should be relevant for antitrust policy in light of controversial market reorganizations—vertical integrations, mergers, acquisitions—likely to create cost asymmetries among firms.