Price and quantity competition in a differentiated duopoly with heterogeneous beliefs

Haiyang Xia

Manchester School, 2021, vol. 89, issue 1, 46-69

Abstract: The purpose of this paper is to investigate the impact of heterogeneous beliefs about market demand on the profitability of firms under different competitive settings. To this end I consider a differentiated duopoly model where two firms with different beliefs about the market demand can compete in quantity (Cournot competition) or in price (Bertrand competition). The results show that the optimistic firm can outperform the pessimistic firm in profits under Cournot competition even in the state of Low demand as long as the ratio of High demand over Low demand is sufficiently low. Under Bertrand competition, however, if the ratio of High demand over Low demand is sufficiently low or the overall optimism of the two firms is sufficiently high, the pessimistic firm can gain higher profit than the optimistic one even when demand is high.

Date: 2021
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https://doi.org/10.1111/manc.12348

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