The Equivalence of Price and Quantity Competition with Incentive Scheme Commitment

Nolan H. Miller and Amit Pazgal

No 1224, Discussion Papers from Northwestern University, Center for Mathematical Studies in Economics and Management Science

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.

Date: 1998-09
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