The Bargaining-sales-delegation Game

This article revisits the managerial delegation literature led by Vickers (1985), Fershtman and Judd (1987) and Sklivas (1987) by introducing a bargaining mechanism between owners and managers over managerial contracts. It shows that the degree of bargaining interacts with the extent of product differentiation in determining whether the sub-game perfect Nash equilibrium is sales delegation or profit maximisation. In contrast with the classical result, no sales delegation emerges and the typical prisoner’s dilemma of the managerial delegation literature is solved. This holds in both contexts of Cournot and Bertrand rivalries. The article also provides results for the more general cases with heterogeneous managerial bargaining power and endogenous decisions of the owners regarding the bargaining power of the manager that should be or not be hired in a firm.