A BEJTE Topics article.

Abstract

The rate of cost pass-through exceeds 50% under strategic delegation of decision-making to managers with sales revenue contracts—regardless of the number of firms in the industry and demand curvature. This contrasts sharply with profit-maximization, for which cost pass-through can take on any positive value. The key intuition is that firms under delegation act as if they faced more rivals than they actually do, thus pushing cost pass-through towards 100%. Cost pass-through with market share contracts is similarly bounded below, and this note also generalizes existing results on equilibrium characterization for this case.

Submitted: March 23, 2007 · Accepted: October 1, 2008 · Published: January 21, 2009

Recommended Citation

Ritz, Robert A. (2008) "Cost Pass-Through under Delegation," The B.E. Journal of Theoretical Economics: Vol. 8 : Iss. 1 (Topics), Article 30.
DOI: 10.2202/1935-1704.1383
Available at: http://www.bepress.com/bejte/vol8/iss1/art30