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When an inefficient firm makes higher profit than its efficient rival

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  • Sen, Debapriya
  • Stamatopoulos, Giorgos

Abstract

This paper considers a Cournot duopoly game with endogenous organization structures. There are two firms A and B who compete in the retail market, where A is more efficient than B. Prior to competition in the retail stage, firms simultaneously choose their organization structures which can be either 'centralized' (one central unit chooses quantity to maximize firm's profit) or 'decentralized' (the retail unit chooses quantity to maximize firm's revenue while the production unit supplies the required quantity). Identifying the (unique) Nash Equilibrium for every retail-stage subgame, we show that the reduced form game of organization choices is a potential game. The main result is that with endogenous organization structures, situations could arise where the less efficient firm B obtains a higher profit than its more efficient rival A.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 23324.

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Date of creation: 16 Jun 2010
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Handle: RePEc:pra:mprapa:23324

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Keywords: Centralized structure; decentralized structure; potential games;

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  1. Monderer, Dov & Shapley, Lloyd S., 1996. "Potential Games," Games and Economic Behavior, Elsevier, Elsevier, vol. 14(1), pages 124-143, May.
  2. Fershtman, Chaim & Judd, Kenneth L, 1987. "Equilibrium Incentives in Oligopoly," American Economic Review, American Economic Association, American Economic Association, vol. 77(5), pages 927-40, December.
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