IDEAS home Printed from https://ideas.repec.org/a/gam/jgames/v13y2022i2p28-d784661.html
   My bibliography  Save this article

CEO Bias and Product Substitutability in Oligopoly Games

Author

Listed:
  • Elizabeth Schroeder

    (Department of Economics, Oregon State University, Corvallis, OR 97331, USA)

  • Carol Horton Tremblay

    (Department of Economics, Oregon State University, Corvallis, OR 97331, USA)

  • Victor J. Tremblay

    (Department of Economics, Oregon State University, Corvallis, OR 97331, USA)

Abstract

We investigate why a firm might purposefully hire a chief executive officer (CEO) who under- or over-estimates the degree of substitutability between competing products. This counterintuitive result arises in imperfect competition because CEO bias can affect rival behavior and the intensity of competition. We lay out the conditions under which it is profitable for owners to hire biased managers. Our work shows that a universal policy that effectively eliminates such biases need not improve social welfare.

Suggested Citation

  • Elizabeth Schroeder & Carol Horton Tremblay & Victor J. Tremblay, 2022. "CEO Bias and Product Substitutability in Oligopoly Games," Games, MDPI, vol. 13(2), pages 1-23, March.
    • Handle: RePEc:gam:jgames:v:13:y:2022:i:2:p:28-:d:784661
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2073-4336/13/2/28/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2073-4336/13/2/28/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Florian Englmaier & Markus Reisinger, 2014. "Biased Managers as Strategic Commitment," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 35(5), pages 350-356, July.
    2. Florian Englmaier, 2011. "Commitment in R&D tournaments via strategic delegation to overoptimistic managers," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 32(1), pages 63-69, January.
    3. Mark Armstrong & Steffen Huck, 2011. "Behavioral Economics as Applied to Firms: A Primer," Antitrust Chronicle, Competition Policy International, vol. 1.
    4. Thomas Blake & Chris Nosko & Steven Tadelis, 2015. "Consumer Heterogeneity and Paid Search Effectiveness: A Large‐Scale Field Experiment," Econometrica, Econometric Society, vol. 83, pages 155-174, January.
    5. Dhami, Sanjit, 2016. "The Foundations of Behavioral Economic Analysis," OUP Catalogue, Oxford University Press, number 9780198715535.
    6. Victor J. Tremblay & Carol Horton Tremblay, 2012. "New Perspectives on Industrial Organization," Springer Texts in Business and Economics, Springer, edition 127, number 978-1-4614-3241-8, August.
    7. Ulrike Malmendier & Geoffrey Tate, 2015. "Behavioral CEOs: The Role of Managerial Overconfidence," Journal of Economic Perspectives, American Economic Association, vol. 29(4), pages 37-60, Fall.
    8. Amir, Rabah & Grilo, Isabel, 1999. "Stackelberg versus Cournot Equilibrium," Games and Economic Behavior, Elsevier, vol. 26(1), pages 1-21, January.
    9. Avinash Dixit, 1979. "A Model of Duopoly Suggesting a Theory of Entry Barriers," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 20-32, Spring.
    10. Carol Horton Tremblay & Victor J. Tremblay, 2019. "Oligopoly Games And The Cournot–Bertrand Model: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 33(5), pages 1555-1577, December.
    11. Michael D. Grubb, 2015. "Overconfident Consumers in the Marketplace," Journal of Economic Perspectives, American Economic Association, vol. 29(4), pages 9-36, Fall.
    12. Spiegler, Ran, 2014. "Bounded Rationality and Industrial Organization," OUP Catalogue, Oxford University Press, number 9780199334261.
    13. Florian Englmaier, 2010. "Managerial optimism and investment choice," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 31(4), pages 303-310.
    14. Victor J. Tremblay & Elizabeth Schroeder & Carol Horton Tremblay (ed.), 2018. "Handbook of Behavioral Industrial Organization," Books, Edward Elgar Publishing, number 16609.
    15. Justin M. Rao & Andrey Simonov, 2019. "Firms’ reactions to public information on business practices: The case of search advertising," Quantitative Marketing and Economics (QME), Springer, vol. 17(2), pages 105-134, June.
    16. 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.
    17. Elizabeth Schroeder & Carol Horton Tremblay & Victor J. Tremblay, 2021. "Confidence bias and advertising in imperfectly competitive markets," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(4), pages 885-897, June.
    18. Huw Dixon, 2020. "Almost‐Maximization as a Behavioral Theory of the Firm: Static, Dynamic and Evolutionary Perspectives," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 56(2), pages 237-258, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jean‐Baptiste Tondji, 2022. "Overconfidence and welfare in a differentiated duopoly," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(3), pages 751-767, April.
    2. Elizabeth Schroeder & Carol Horton Tremblay & Victor J. Tremblay, 2021. "Confidence bias and advertising in imperfectly competitive markets," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(4), pages 885-897, June.
    3. Nicola Meccheri, 2021. "Biased managers in vertically related markets," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(3), pages 724-736, April.
    4. Meccheri Nicola, 2023. "On the Social Desirability of Centralized Wage Setting when Firms are Run by Biased Managers," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 23(3), pages 701-725, July.
    5. Nicola Meccheri, 2019. "Biased managers in a vertical structure," Working Paper series 19-12, Rimini Centre for Economic Analysis.
    6. Yasuhiko Nakamura, 2022. "Corporate social responsibility and endogenous competition structure in an industry composed of firms with biased managers," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 69(2), pages 301-321, June.
    7. Nakamura, Yasuhiko, 2019. "Combining the endogenous choice of the timing of setting incentive parameters and the contents of strategic contracts in a managerial mixed duopoly," International Review of Economics & Finance, Elsevier, vol. 59(C), pages 207-233.
    8. Elizabeth Schroeder & Victor Tremblay, 2015. "A Reappraisal of Strategic Trade Policy," Journal of Industry, Competition and Trade, Springer, vol. 15(4), pages 435-442, December.
    9. Michael Grubb, 2015. "Behavioral Consumers in Industrial Organization: An Overview," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 47(3), pages 247-258, November.
    10. John Gilbert & Onur A. Koska & Reza Oladi, 2022. "International trade, differentiated goods, and strategic asymmetry," Southern Economic Journal, John Wiley & Sons, vol. 88(3), pages 1178-1198, January.
    11. Victor J. Tremblay & Mo Xiao, 2020. "Introduction: Firms with Behavioral Biases," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 56(2), pages 199-202, March.
    12. Elizabeth Bailey, 2015. "Behavioral Economics and U.S. Antitrust Policy," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 47(3), pages 355-366, November.
    13. Ciprian Rusescu & Mihai Daniel Roman, 2020. "Product Differentiation Impact on Games Theory Models," Ovidius University Annals, Economic Sciences Series, Ovidius University of Constantza, Faculty of Economic Sciences, vol. 0(2), pages 500-508, December.
    14. Takeshi Murooka & Yuichi Yamamoto, 2021. "Misspecified Bayesian Learning by Strategic Players: First-Order Misspecification and Higher-Order Misspecification," OSIPP Discussion Paper 21E008, Osaka School of International Public Policy, Osaka University.
    15. Ulrike Malmendier, 2018. "Behavioral Corporate Finance," NBER Working Papers 25162, National Bureau of Economic Research, Inc.
    16. Clemens Buchen & Alberto Palermo, 2020. "A biased firm in a market with complementary products. A note on the welfare effects," Scottish Journal of Political Economy, Scottish Economic Society, vol. 67(4), pages 448-453, September.
    17. repec:bla:annpce:v:89:y:2018:i:1:p:235-249 is not listed on IDEAS
    18. Malmendier, Ulrike M. & Pezone, Vincenzo & Zheng, Hui, 2020. "Managerial Duties and Managerial Biases," CEPR Discussion Papers 14929, C.E.P.R. Discussion Papers.
    19. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899.
    20. Elizabeth Schroeder & Victor J. Tremblay, 2014. "Union Bargaining in an Oligopoly Market with Cournot-Bertrand Competition: Welfare and Policy Implications," Economies, MDPI, vol. 2(2), pages 1-14, March.
    21. Michael D. Grubb, 2015. "Behavioral Consumers in Industrial Organization," Boston College Working Papers in Economics 879, Boston College Department of Economics.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jgames:v:13:y:2022:i:2:p:28-:d:784661. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.