Strategic managerial delegation and industrial policy competition in vertically-related markets

•Examine strategic upstream managerial delegation and downstream industrial policy•A less efficient upstream SOE will price its output below marginal cost.•The upstream mixed duopoly will compete in profits and sales.•Home country will subsidize its downstream firm if the market is large or small foreign output.•The foreign government will always subsidize its downstream firm.

In a successive duopoly in which all firms are private except the home upstream SOE, we show that if the SOE is less efficient than its foreign rival, the home managerial delegation policy will force the SOE to price below marginal cost; otherwise, it will resort to marginal cost pricing to force out its rival. Both upstream firms will not be pure profit maximizers and will compete in profit and sales. The home government will subsidize its downstream firm if the market is large or the foreign rival's output is small. The foreign government will always subsidize its downstream firm.