Network Externalities and Strategic Managerial Delegation in Cournot Duopoly: Is There a Prisoners’ Dilemma?

Abstract

This paper analyzes the implications of network externalities on strategic managerial delegation contracts in a Cournot duopoly. It shows that, in the presence of strong network externalities, firms obtain higher profits in the equilibrium under strategic managerial delegation compared with that under no-delegation. Unlike as in the case of weak or no network externalities, owners of firms do not face a Prisoners’ Dilemma type of situation while deciding incentive schemes – sales-oriented vis-à-vis based on profits only – for managers in the presence of strong network externalities. However, both consumers’ surplus and social welfare are higher in the equilibrium under strategic managerial delegation compared to those under no delegation, irrespective of the strength of network externalities.

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