The Choice of Prices vs. Quantities under Uncertainty

Markus Reisinger and Ludwig Reßner

Discussion Papers in Economics from University of Munich, Department of Economics

Abstract: This paper analyzes a duopoly model with stochastic demand in which firms first choose their strategy variable and compete afterwards. Contrary to the existing literature, we show that firms do not always choose a quantity which is the variable that induces a smaller degree of competition. The reason is that demand uncertainty and the degree of substitutability have countervailing effects on variable choice. Higher uncertainty favors prices, while closer substitutability favors quantities. Moreover, for intermediate values firms choose different strategy variables in equilibrium.

Keywords: Competition; Strategy Variables; Demand Uncertainty (search for similar items in EconPapers)
JEL-codes: D43 L13 (search for similar items in EconPapers)
Date: 2007-05
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