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Strategic Communication: Prices Versus Quantities

Ricardo Alonso, Wouter Dessein () and Niko Matouschek

Journal of the European Economic Association, 2010, vol. 8, issue 2-3, 365-376

Abstract: We examine how cheap talk communication between managers within the same firm depends on the type of decisions that the firm makes. A firm consists of a headquarters and two operating divisions. Headquarters is unbiased but does not know the demand conditions in the divisions' markets. Each division manager knows the demand conditions in his market but is also biased toward his division. The division managers communicate with headquarters, which then sets either the prices or quantities for each division. The quality of communication depends on whether headquarters sets prices or quantities. This is the case even though, once communication has taken place, expected profits are the same whether headquarters sets prices or quantities. (JEL: D21, D83, L20) (c) 2010 by the European Economic Association.

JEL-codes: D21 D83 L20 (search for similar items in EconPapers)
Date: 2010
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Journal of the European Economic Association is currently edited by Xavier Vives, George-Marios Angeletos, Orazio P. Attanasio, Fabio Canova and Roberto Perotti

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