Discriminatory Input Pricing and Strategic Delegation

This paper examines how discriminatory input pricing by an upstream monopolist affects the incentives that owners of downstream duopolists offer their managers. Regardless of the mode of competition (quantity or price), owners of downstream firms induce their managers to be more profit- oriented and to behave less aggressively when the monopolist is allowed to price-discriminate than when he charges a uniform price. If the monopolist price-discriminates, managerial downstream firms always earn more than ownermanaged profit-maximizing firms. However, if the monopolist charges a uniform price, managerial downstream firms earn more than profit- maximizing counterparts under price competition and earn less under quantity competition. Copyright (C) 2009 John Wiley & Sons, Ltd.