Discussion After release from the priming deficit this study
Consider the equilibrium bonus function which can be expressed as functions of the market power alone:b(m)=b(m,μ(m),u(μ(m))).I only consider the second best contracts here since incentives do not make much sense in a first best contract. Differentiating the above PD168393 with respect to m one gets: 10b′(m)=∂b∂m+∂b∂qμ′(m)+∂b∂uu′(q)μ′(m)=H(m)μ′(m).where H(m) > 0. Therefore,sign[b′(m)]=sign[μ′(m)].sign[b′(m)]=sign[μ′(m)].Since e = qb, the equilibrium effort follows the same pattern with respect to m. It is easy to prove thatsign[e′(m)]=sign[μ′(m)].sign[e′(m)]=sign[μ′(m)].Therefore,Proposition 5.
4. Sources of market power
Market power of a megaspores firm, i.e., its ability to price its product over and above the marginal cost may stem from various sources which may have differential implications for the equilibrium allocations, and in particular for managerial incentives. In what follows I consider three different sources of market power: market size, market-specific price cap regulation, and technological efficiency. In all cases, a higher value of m translates into greater price-cost margin, and the exercises boil down to analyzing the sign of Δ′(m) which implies assortative matching, and relationship between managerial incentives and market power.