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The Equivalence of Price and Quantity Competition with Incentive Scheme Commitment

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  • Nolan H. Miller
  • Amit Pazgal

Abstract

We consider a two stage diffrentiated products duopoly model (with linear demand and constant marginal cost). In the first stage prot maximizing owners choose incentive schemes in order to induce their managers to exhibit a certain type of behavior. In the second stage the managers compete either in prices or in quantities. In contrast to Singh and Vives (1984), we show that if the owners have sufficient power to manipulate the incentives of their managers, the equilibrium outcome is the same regardless of whether the rms compete in prices or in quantities. Basing the manager's objective function on a convex combination of own profit and the difference between own profit and the rival firm's profit is sufficient for the equivalence result to hold.

Suggested Citation

  • Nolan H. Miller & Amit Pazgal, 1998. "The Equivalence of Price and Quantity Competition with Incentive Scheme Commitment," Discussion Papers 1224, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    • Handle: RePEc:nwu:cmsems:1224
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    References listed on IDEAS

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    1. 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.
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