A product innovation game with managerial delegation

Abstract

AbstractThis research introduces sales delegation in a product innovation game by considering Cournot and Bertrand duopolies. The article first revisits the existing results with profit‐maximising firms, showing that a prisoner's dilemma with undifferentiated products cannot occur in a Bertrand rivalry setting. Then, by considering the separation between ownership and control, the work shows, when managers are delegated to choose only over quantity or price in the product market, that sales delegation (1) increases (resp. reduces) the likelihood to innovate (not to innovate) under Cournot competition, and (2) increases the likelihood to innovate under Bertrand competition compared to the profit‐maximising setting. Unlike this, if managers are delegated to choose over quantity or price in the product market and product innovation is in the decision‐making stage, sales delegation reduces the likelihood of innovation in both Cournot and Bertrand rivalry settings. Overall, results pinpoint the importance of the managerial delegation in affecting investments in product innovation compared to the profit‐maximising model.