Incentive contracts and advertising in oligopoly

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Advances in Applied Microeconomics

ISSN: 0278-0984
Series editor(s): Professor Michael Baye, Professor John Maxwell

Subject Area: Economics

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Document Information:
Title:	Incentive contracts and advertising in oligopoly
Author(s):	Jae-Woo Lee
Volume:	8 ISBN: 978-0-76230-576-6 eISBN: 978-1-84950-037-1
Citation:	Jae-Woo Lee (2000), Incentive contracts and advertising in oligopoly, in (ed.) 8 (Advances in Applied Microeconomics, Volume 8), Emerald Group Publishing Limited, pp.249-267
DOI:	10.1016/S0278-0984(99)08012-8 (Permanent URL)
Publisher:	Emerald Group Publishing Limited
Article type:	Full length article
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.