Biased managers in vertically related markets

This paper analyses the choice of managers' types in a vertical structure with a common input supplier. Depending on the degree of product differentiation, the choice of either an overconfident or an underconfident manager can arise whatever the downstream competition mode. In addition, when competition is in quantities, the well‐known prisoner's dilemma result of strategic delegation does not apply when owners optimally delegate to underconfident managers. Instead, under price competition, a prisoner's dilemma applies but only when the strategic decision is optimally delegated to overconfident managers. Relative to the endogenous market structure, a novel outcome with multiple asymmetric equilibria arises when the degree of product differentiation is low. Introducing multiple upstream suppliers confirms the importance of taking the structure of upstream markets into account in assessing the strategic choices by downstream firms.