Incentive contracts and advertising in oligopoly

Abstract

This chapter examines the optimal choice of managerial incentives for firm owners in a multi-stage oligopoly. In our three-stage owner-manager game, characterized by pre-product launch investments such as advertising, the owners never tell their managers to maximize profits. The contract to maximize profits is not a self-representational Nash Equilibrium. When advertising is a strategic substitute, the owners induce their managers to advertise more aggressively than is necessary for profit maximization, even if they only care about profits. When advertising is a strategic complement, however, the strategic effects are reversed.

Citation

Lee, J.-W. (2000), "Incentive contracts and advertising in oligopoly", Advances in Applied Microeconomics (Advances in Applied Microeconomics, Vol. 8), Emerald Group Publishing Limited, Leeds, pp. 249-267. https://doi.org/10.1016/S0278-0984(99)08012-8