Cost pass-through under delegation

Working paper

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.

Authors: Ritz, R

• Publication status: Published
• Publisher: University of Oxford
• Series: Department of Economics Discussion Paper Series
• Publication date: 2008-10-01
• Paper number: 404
• Keywords: excise taxation; executive compensation; cost pass-through; market share; strategic delegation