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

  • Trishita Bhattacharjee

    ()

    (Indira Gandhi Institute of Development Research)

  • Rupayan Pal

    ()

    (Indira Gandhi Institute of Development Research)

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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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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  16. Luciano Fanti & Nicola Meccheri, 2010. "The Cournot-Bertrand Profit Differential in a Differentiated Duopoly with Unions and Labour Decreasing Returns," Working Paper Series 36_10, The Rimini Centre for Economic Analysis.
  17. Häckner, Jonas, 1999. "A Note on Price and Quantity Competition in Differentiated Oligopolies," Research Papers in Economics 1999:9, Stockholm University, Department of Economics.
  18. Scrimitore, Marcella, 2013. "Price or quantity? The strategic choice of subsidized firms in a mixed duopoly," Economics Letters, Elsevier, vol. 118(2), pages 337-341.
  19. Ziss, Steffen, 2001. "Horizontal mergers and delegation," International Journal of Industrial Organization, Elsevier, vol. 19(3-4), pages 471-492, March.
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  25. Matsumura, Toshihiro & Ogawa, Akira, 2012. "Price versus quantity in a mixed duopoly," Economics Letters, Elsevier, vol. 116(2), pages 174-177.
  26. Kangsik Choi, 2012. "Price And Quantity Competition In A Unionised Mixed Duopoly: The Cases Of Substitutes And Complements," Australian Economic Papers, Wiley Blackwell, vol. 51(1), pages 1-22, 03.
  27. Trishita Bhattacharjee & Rupayan Pal, 2013. "Managerial delegation under network effects," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2013-003, Indira Gandhi Institute of Development Research, Mumbai, India.
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