Successive duopoly under moral hazard: Will incentive contracts persist?
Abstract: The central purpose
of this paper is to examine the incentive contract as an equilibrium
phenomenon. We analyse a model of vertical differentiation in which we deal
with the strategic role of the competitor’s decisions in a successive duopoly.
Is it better for a processor to offer an incentive contract to an upstream
producer or the spot market? We determine the equilibrium of a game in which
the processors simultaneously decide whether to offer an incentive contract or
to continue at the spot market to acquire their input. Our results show that
under successive duopoly, offering an incentive contract constitutes the unique
equilibrium solution, which highlights the incentive contract persistence.
Author: Marta Fernández-Olmos,
Jorge Rosell Martínez, Manuel Antonio Espitia Escuer, Luz María Marín Vinuesa
Journal Code: jptindustrigg090011
