Strategic Delegation in a Durable Goods Monopoly

Abstract

This paper studies a simultaneous-move infinite-horizon delegation game in which the principal of a durable goods monopoly entrusts pricing decisions to a manager who enjoys monetary rewards but dislikes production effort. We show that cheap delegation enables the principal to attain the precommitment price plan in a time consistent Markov-perfect equilibrium. The paper analyzes the robustness of this result under alternative specifications of timing and objectives. We also provide a numerical characterization of the Markov-perfect equilibrium pricing and remuneration strategies for the case of linear-quadratic payoffs.

Keywords: Games, Monopoly, Pricing decisions, Equilibrium

JEL Classification: L12, D42, C73