Location choice with delegation: Bertrand vs. Cournot competition

The conventional wisdom indicates that firms' optimal locations are sensitive to the modes of product-market competition, leading to a difficulty for firms to make concrete location decisions. This difficulty is especially crucial for the high entry-cost firms. The paper develops an uncovered-market model à la Economides (1984) to explore this sensitivity by taking into account a delegation game. It shows that firms' location configurations remain unchanged regardless of the modes of product-market competition as the owners offer the managers a contract with a relative-performance incentive scheme. Moreover, the paper shows that, by introducing a delegation game, the competition between managers under Bertrand competition is mitigated such that the managers have no incentive to choose price undercutting as they locate themselves far enough away from each other.

Research Highlights► The paper develops an uncovered-market model with a delegation game. ► It examines firms' location configurations with a relative-performance incentive scheme. ► Firms' location configurations remain unchanged under Bertrand and Cournot competition. ► The conditions for the managers to choose price undercutting are derived.