Clemens Löffler

Organizational Governance, Leadership, and the Influence of Competition

This paper studies the emergence of firm asymmetry as an equilibrium outcome. We consider differentiated Cournot and Bertrand duopolies where firms endogenously select their organizational governance and their timing strategy. For Cournot competition asymmetric and symmetric equilibria may occur. In an asymmetric equilibrium, firms always select different organizational structures. In Bertrand competition, firms always select different timing strategies at the market stage, but may select the same organizational structure. For Bertrand competition we observe that firm profits are nonmonotonic in the intensity of competition, so that firms might be better off if the intensity of competition between firms increases.

Controlling for supplier switching in the presence of real options and asymmetric information

Applying a real option approach, this paper examines how asymmetric information alters key variables of a firm’s supplier switching process, such as the timing of contracting (hurried versus delayed contracting), transfer payments, set-up, switching, and abandonment decisions. In a symmetric information setting, delayed contracting is unambiguously beneficial. Abandoning the once established relation with the entrant supplier is never an issue. In contrast, under asymmetric information hurried contracting with potentially abandoning the relation can be beneficial. Consistent with adverse selection models, we find that under delayed contracting, in equilibrium, the firm switches less frequently to the entrant supplier (switching inertia). Surprisingly, we also find that under hurried contracting the firm switches more frequently to the entrant supplier (switching acceleration) and may abandon the relation. Finally, we study how these key variables of the supplier switching process change when also the incumbent supplier has private information (two-sided asymmetric information case).

The middleman as a panacea for supply chain coordination problems

The prevalence of intermediaries (middlemen) in supply chains is often seen as a dying remnant of less efficient times. Despite predictions that supply chains will rapidly “cut out the middleman” as technological advances have eased logistics, middlemen have continued to thrive. In this paper, we demonstrate a transaction role of middlemen that may help clarify their staying power. In a model with self-interested decision-making by both a manufacturer and a retailer, wherein incentive misalignment creates investment and production inefficiencies, we show that the integrated (first-best) outcome can be achieved with simple cost-based contracts if and only if a middleman is present. We further show that the approach of utilizing a middleman to fully coordinate the supply chain is robust in that it can be applied to a variety of circumstances discussed in the literature, including multilateral investment/effort choices, multiple product providers, and logistical investments made by the middleman.

Sourcing strategies of a multi-input-multi-product firm

Firms commonly manufacture multiple products using multiple complementary inputs. The multi-input-multi-product environment generates interactions among products yielding the following results for the firms sourcing strategies: (i) A multi-input-multi-product firm might optimally deviate from an isolated least-cost comparison, i.e. might produce in-house even if marginal in-house production cost exceeds the per-unit input price (and vice versa). Such a deviation can be optimal even if the input supplier can engage in price discrimination and can condition its input prices on the individual products that the firm manufactures. (ii) An outsourcing wave can arise in that concurrently outsourcing all inputs can be profitable for the firm even though outsourcing each input individually is unprofitable. (iii) More competition on the supplier market can decrease the multi-input-multi-product firms profit.

The irreversibility effect and agency conflicts

This paper studies the influence of agency conflicts on the irreversibility effect. Using a dynamic variant of the static Baron and Myerson (Econometrica 50(4):911–930, 1982 ) adverse selection model, we characterize under which circumstances the irreversibility effect arises in the presence and absence of an agency conflict. In particular, we find that in the presence of an agency conflict the irreversibility effect arises in more circumstances than in the standard first-best analysis that abstracts from agency problems. Copyright Springer Science+Business Media New York 2013

Delegation, R&D and competitiveness in a Bertrand duopoly

This paper studies the profitability of centralized investments in R&D versus decentralized price determination in a duopoly for Bertrand consumer markets. As a direct effect, R&D investments lower the firm’s production costs and thus increase c.p. the firm’s profits. However, as an indirect effect, lowering production costs causes market reactions and alters the competition between the firm and its competitors. In the extreme, aggressive competition can occur that diminish an investing firm’s profits. Delegating the price decision using an incentive contract distorts a manager’s perceived costs and induces a virtual cost increase in equilibrium. Trading off the factual cost reduction against a virtual cost increase we find that competition makes strategic delegation more attractive compared to investments in R&D. If firms are allowed to apply both strategies in combination, they concentrate on just one of them for strategic considerations.

Transfer Prices for Coordination Under Decentralized Decision Making

This paper provides an overview of selected transfer pricing systems that are applied to achieve coordination within a decentralized firm. Specifically, we highlight the specific properties of transfer pricing systems when an intermediate product is sold internally via the transfer price but concurrently also sold on an external market. We adopt an incomplete contracting framework with asymmetric information at the trading stage. In this stylized model, transfer pricing guides intra-company trade and provides incentives for value-enhancing specific investments. Dependent on the distribution of information within the firm, we illustrate how these transfer pricing schemes are able to achieve coordination.

An Evaluation of Alternative Market-Based Transfer Prices

We investigate a transfer pricing problem between two divisions within a decentralized firm. An upstream division produces an intermediate good that is used by another division within the firm and is also sold in an external market, where the firm competes with a rival selling a differentiated substitute product. Assuming that headquarters has imperfect information about the upstream divisions private information and that communication is restricted, we identify conditions under which the firm will prefer a market-based transfer price based on the market price set by the firms rival rather than on the market price set by the upstream division. The two transfer prices affect the price-setting incentives of the upstream division and its rival differently, and convey different levels of private-cost information to the downstream division, which impacts internal trade efficiency. The relative performance of the two transfer pricing regimes depends on the relative size of internal versus external demand for the upstream divisions good and on the degree of uncertainty about the upstream divisions costs. Overall, our analysis provides new insights about how alternative market-based transfer prices can coordinate decentralized decision-making in the absence of a perfectly competitive intermediate market.

Strategic Delegation and Dynamic Competition

The separation of ownership and control in firms brings up the issue of how and what to delegate to managers. There exists a large body of literature that analyzes strategic delegation in which owners understand the incentives that managers face when they operate in imperfectly competitive product markets. In this paper we analyze strategic delegation under the assumption that firms operate in dynamic oligopolies. We derive the optimal strategic incentive in this setting and point out that the dynamic incentive can be replicated by a static one in which firms play a conjectural variations equilibrium in the output market.