Managerial Incentives and Competition with Fully Stratecic Principals: Comments on Raith

We present a solution for a three stage spatial competition model that does not require restrictive assumptions on price expectations. This allows us to generalize the Raith (2003) model to the case where principals behave in a fully strategic fashion both in the price and in the compensation stage. Since managerial incentives are strategic complements, optimal managerial compensation is lower than in Raith while prices and expected profits are higher. In addition, fully strategic principals involve three surprising, but ultimately intuitive, implications: managerial incentives are higher under price regulation than competition; prices may increase with the number of firms; and consumer welfare may diminish in response to increasing competition.