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Delegation in a Vertically Differentiated Duopoly
Author(s) -
Barros Fatima,
Grilo Isabel
Publication year - 2002
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/1467-9957.00290
Subject(s) - duopoly , delegation , delegate , microeconomics , quality (philosophy) , private information retrieval , information asymmetry , context (archaeology) , product differentiation , economics , realization (probability) , product (mathematics) , industrial organization , cournot competition , business , computer science , mathematics , computer security , paleontology , philosophy , statistics , geometry , management , epistemology , biology , programming language
In a context of vertical product differentiation we analyze the effect of delegation on quality levels. We consider a duopoly where firms can delegate the quality‐determining activities to an agent. The realization of the random cost associated with the quality level is known, at no cost, by the firm or the agent that undertakes these activities. By delegating, a firm faces an asymmetry of information since the owner cannot observe the realization of the random variable, which is the agent’s private information. When one firm delegates and the other does not, we find two equilibria that mimic the full information situation, and two equilibria which display quality levels for the delegating firm lower than the full information ones. When the delegation decision is endogenous there are equilibrium configurations with zero, one and two delegating firms.