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Choosing price or quantity? The role of delegation and network externalities

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  • Chirco, Alessandra
  • Scrimitore, Marcella

Abstract

We consider a differentiated duopoly and endogenise the firm choice of the strategy variable (price or quantity) to play on the product market in the presence of network externalities. We model this choice by assuming both competition between entrepreneurial (owner-managed) firms and competition between managerial firms in which market decisions are delegated from owners to revenue-concerned managers. While network externalities are shown not to alter the symmetric equilibrium quantity choice arising in the no-delegation case, sufficiently strong network effects allow us to eliminate the multiplicity of equilibria under delegation and lead to a unique equilibrium in which both firms choose price.

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Bibliographic Info

Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 121 (2013)
Issue (Month): 3 ()
Pages: 482-486

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Handle: RePEc:eee:ecolet:v:121:y:2013:i:3:p:482-486

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Web page: http://www.elsevier.com/locate/ecolet

Related research

Keywords: Price competition; Quantity competition; Network externalities; Strategic delegation;

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References

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  1. Chaim Fershtman & Kenneth L Judd, 1984. "Equilibrium Incentives in Oligopoly," Discussion Papers 642, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Luis Cabral, 2008. "Dynamic Price Competition with Network Effects," Working Papers 08-4, New York University, Leonard N. Stern School of Business, Department of Economics.
  3. Trishita Bhattacharjee & Rupayan Pal, 2013. "Price vs. Quantity in duopoly with strategic delegation: Role of network externalities," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2013-010, Indira Gandhi Institute of Development Research, Mumbai, India.
  4. Miller, Nolan H & Pazgal, Amit I, 2001. "The Equivalence of Price and Quantity Competition with Delegation," RAND Journal of Economics, The RAND Corporation, vol. 32(2), pages 284-301, Summer.
  5. Luca Lambertini, 1997. "Strategic Delegation and the Shape of Market Competition," Discussion Papers 97-01, University of Copenhagen. Department of Economics.
  6. Tanaka, Yasuhito, 2001. "Profitability of price and quantity strategies in an oligopoly," Journal of Mathematical Economics, Elsevier, vol. 35(3), pages 409-418, June.
  7. Hoernig, Steffen, 2012. "Strategic delegation under price competition and network effects," Economics Letters, Elsevier, vol. 117(2), pages 487-489.
  8. Nirvikar Singh & Xavier Vives, 1984. "Price and Quantity Competition in a Differentiated Duopoly," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 546-554, Winter.
  9. Tasnadi, Attila, 2006. "Price vs. quantity in oligopoly games," International Journal of Industrial Organization, Elsevier, vol. 24(3), pages 541-554, May.
  10. Thijs Jansen & Arie van Lier & Arjen van Witteloostuijn, 2009. "On the impact of managerial bonus systems on firm profit and market competition: the cases of pure profit, sales, market share and relative profits compared," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 30(3), pages 141-153.
  11. Cabral, Luis M. B. & Salant, David J. & Woroch, Glenn A., 1999. "Monopoly pricing with network externalities," International Journal of Industrial Organization, Elsevier, vol. 17(2), pages 199-214, February.
  12. Constantine Manasakis & Evangelos Mitrokostas & Emmanuel Petrakis, 2010. "Endogenous managerial incentive contracts in a differentiated duopoly, with and without commitment," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 31(8), pages 531-543, December.
  13. Steven D. Sklivas, 1987. "The Strategic Choice of Managerial Incentives," RAND Journal of Economics, The RAND Corporation, vol. 18(3), pages 452-458, Autumn.
  14. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
  15. Vickers, John, 1985. "Delegation and the Theory of the Firm," Economic Journal, Royal Economic Society, vol. 95(380a), pages 138-47, Supplemen.
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Cited by:
  1. Rupayan Pal, 2014. "Price and quantity competition in network goods duopoly: a reversal result," Economics Bulletin, AccessEcon, vol. 34(2), pages 1019-1027.
  2. Alipranti, Maria & Milliou, Chrysovalantou & Petrakis, Emmanuel, 2014. "Price vs. quantity competition in a vertically related market," Economics Letters, Elsevier, vol. 124(1), pages 122-126.

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