The endogenous choice of delegation in a duopoly with input outsourcing to the rival

In a market in which a vertically integrated producer (VIP) supplies an essential input to a retail rival, we explore the role of managerial delegation when it shapes downstream firms’ incentives and determine the endogenous choice of delegation under both Cournot and Bertrand competition. The equilibrium choice of acting as a managerial firm, which is a standard result in literature of strategic delegation, is shown to be robust to the presence of a vertical supply relationship in both the quantity competition and the price competition framework, regardless of the degree of product differentiation. The paper, however, highlights the different motives pushing the integrated firm and the independent retailer towards delegation, which also revert the standard result that delegation causes a prisoner’s dilemma-type equilibrium under Cournot and a more profitable outcome under Bertrand. J C : D43, L13, L21. K : Strategic delegation, outsourcing, Cournot competition, Bertrand competition, vertical integration. ∗ Corresponding author Marcella Scrimitore, Dipartimento di Scienze dell’Economia, Università del Salento. Ecotekne, via per Monteroni, 73100 Lecce (Italy). Phone: +39 0832298772; fax: +39 0832298757; email: [email protected].