Strategic delegation in firms competing under incomplete information

Abstract

Since the seminal paper by Coase (1937) the firm and the market have been recognised as alternative institutions through which to organise economic activity. However, there is not such a thing as “the firm”. Firms are different from each other and their internal organisation should not be taken as an exogenous variable. Furthermore, firms do not exist in isolation; they interact with each other within markets. The structure of the market the firm is operating in influences its internal organisation, and in particular the way in which the incentives for the different parties contributing to the firm activity are designed. This is, of course, especially true when the actions taken by one firm have an influence on the behaviour of its rivals, i.e. in oligopolistic markets, where firms interact strategically. In those circumstances firms can take decisions allowing them to commit to a particular course of action and gain a strategic advantage upon rivals.