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The Choice of Prices versus Quantities under Uncertainty

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  • Markus Reisinger
  • Ludwig Ressner

Abstract

This paper analyzes a duopoly model with stochastic demand in which firms first commit to a strategy variable and compete afterwards. We find that in equilibrium the relative magnitude of demand uncertainty and the degree of substitutability determines firms' variable choice. Firms set prices if uncertainty is high compared to the degree of substitutability and quantities if the reverse holds true. The reason is that demand uncertainty and the degree of substitutability have countervailing effects on variable choice: Prices adapt better to uncertainty while quantities induce softer competition. If no effect dominates, firms choose different strategy variables in equilibrium.

Suggested Citation

  • Markus Reisinger & Ludwig Ressner, 2009. "The Choice of Prices versus Quantities under Uncertainty," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 18(4), pages 1155-1177, December.
    • Handle: RePEc:bla:jemstr:v:18:y:2009:i:4:p:1155-1177
    DOI: 10.1111/j.1530-9134.2009.00241.x
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    References listed on IDEAS

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