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When an inefficient firm makes higher profit than its efficient rival

Author

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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.

Suggested Citation

  • Sen, Debapriya & Stamatopoulos, Giorgos, 2010. "When an inefficient firm makes higher profit than its efficient rival," MPRA Paper 23324, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:23324
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    File URL: https://mpra.ub.uni-muenchen.de/23324/1/MPRA_paper_23324.pdf
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    File URL: https://mpra.ub.uni-muenchen.de/59639/8/MPRA_paper_59639.pdf
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    References listed on IDEAS

    as
    1. Fershtman, Chaim & Judd, Kenneth L, 1987. "Equilibrium Incentives in Oligopoly," American Economic Review, American Economic Association, vol. 77(5), pages 927-940, December.
    2. Monderer, Dov & Shapley, Lloyd S., 1996. "Potential Games," Games and Economic Behavior, Elsevier, vol. 14(1), pages 124-143, May.
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    Cited by:

    1. Shohei Yoshida, 2015. "Multiproduct competition in vertically related industries," ISER Discussion Paper 0935, Institute of Social and Economic Research, Osaka University.
    2. F. Delbono & L. Lambertini & L. Marattin, 2015. "Strategic Delegation under Cost Asymmetry," Working Papers wp1016, Dipartimento Scienze Economiche, Universita' di Bologna.

    More about this item

    Keywords

    Centralized structure; decentralized structure; potential games;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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