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Price vs. Quantity in duopoly with strategic delegation: Role of network externalities

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  • Trishita Bhattacharjee

    ()
    (Indira Gandhi Institute of Development Research)

  • Rupayan Pal

    ()
    (Indira Gandhi Institute of Development Research)

Abstract

This paper examines the implications of network externalities on equilibrium outcomes in a differentiated products duopoly under strategic managerial delegation through relative performance based incentive contracts. It shows that Miller and Pazgal (2001)'s equivalence result does not go through in the presence of network externalities. Instead, Singh and Vives (1984)'s rankings of equilibrium outcomes under Cournot and Bertrand hold true under relative performance based delegation contracts as well, if there are network externalities. However, when firms can choose whether to compete in price or in quantity, there are two pure strategy Nash equilibria and one mixed strategy Nash equilibrium. Interestingly, in pure strategy Nash equilibria asymmetric competition occurs, where a firm competes in price and its rival firm competes in quantity. Further, the mixed strategy Nash equilibrium probability of a firm to compete in terms of price increases with the strength of network effects and is always greater than the probability to compete in terms of price.

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Bibliographic Info

Paper provided by Indira Gandhi Institute of Development Research, Mumbai, India in its series Indira Gandhi Institute of Development Research, Mumbai Working Papers with number 2013-010.

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Length: 34 pages
Date of creation: May 2013
Date of revision:
Handle: RePEc:ind:igiwpp:2013-010

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Keywords: Symmetric competition; Price competition; Network externalities; Quantity competition; Relative performance contract; Strategic delegation;

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References

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Cited by:
  1. Chirco, Alessandra & Scrimitore, Marcella, 2013. "Choosing price or quantity? The role of delegation and network externalities," Economics Letters, Elsevier, vol. 121(3), pages 482-486.

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