Managerial Bonus Systems in a Differentiated Duopoly: A Comment

Abstract

A differentiated Cournot duopoly is considered where firm owners delegate the output decision to a manager, who is rewarded on the basis of his performance. If this performance is measured in terms of (i) pure profits, (ii) a combination of profits and sales, (iii) a combination of profits and market share or (iv) relative profits, the latter option strictly dominates the others if the products are perfect substitutes. Recently it was claimed that this result does not hold for all levels of product substitutability. In this comment, we show however that this result is robust against the introduction of product differentiation.

Managerial Delegation Contracts under Centralized Unionization

“…Their key result is that relative performance can be used as a strategic commitment device that can increase firm profits as opposed to a standard Cournot framework where firms directly choose output to maximize their own profits. More recent works (Jansen et al ., ; Manasakis et al ., ; van Witteloostuijn et al ., ; Jansen et al ., ) compared the impact of sales delegation and relative performance incentive contracts on firm profits and market outcomes, showing that, for a wide range of situations, firm owners are better off (i.e., profits are higher) with relative profit delegation, whereas the reverse holds true for consumers and society as a whole (i.e., consumer surplus and social welfare are higher under sales delegation).…”

“…() and Jansen et al . () compared such a scheme against sales delegation and relative profit delegation. We defer to future research the analysis in our (three‐stage) unionized framework of the case with market shares delegation.…”

Common holdings and strategic manager compensation: The case of an asymmetric triopoly

“…First, other possible compensation contracts have been considered where revenues are replaced by market shares (see, e.g., Jansen et al, 2007;Kopel & Lambertini, 2013;Ritz, 2008) or by relative profits (see, e.g., Salas Fumas, 1992, Aggarwal & Samwick, 1999, Chirco et al, 2011, Miller & Pazgal, 2001, 2002. For the duopoly case, a comparison of the different compensation contracts has been provided by Jansen et al (2009Jansen et al ( , 2012. Second, mixed markets have been studied where some firms are governed by managers whereas others are run by the owners themselves (see, e.g., Basu, 1995;Tseng, 2002).…”

Options Compensation as a Commitment Mechanism in Oligopoly Competition

“…(), and Jansen et al . () modeled the use of relative performance contracts and market share contracts as commitment mechanisms under Cournot competition. Yu () develops a similar two‐stage Cournot model to show that CEO overconfidence can also be a commitment mechanism.…”

“…Raith (2003) develops theory for how incentives for cost-cutting relate to product market competition. More recently, Manasakis et al (2010), Chirco et al (2011), and Jansen et al (2012) modeled the use of relative performance contracts and market share contracts as commitment mechanisms under Cournot competition. Yu (2014) develops a similar two-stage Cournot model to show that CEO overconfidence can also be a commitment mechanism.…”