The Equivalence Between Sequential and Simultaneous Firm Decisions

Francisco Silva and Samir Mamadehussene

No 541, Documentos de Trabajo from Instituto de Economia. Pontificia Universidad Católica de Chile.

Abstract: When ?rms compete by choosing two strategic variables (e.g. quality and price), the timing under which ?rms make their decisions (simultaneous vs sequential choice of the strategic variables) plays a critical role, as the equilibrium may be drastically di?erent depending on the timing that is assumed. We rely on the marketing and psychology literatures that provide well-established evidence that consumers do not consider all products in a market, i.e. consumers form “consideration sets”. Under this assumption, we ?nd that in markets where (i) ?rms’ strategies do not in?uence the consideration set formation, and (ii) ?rms are su?ciently uncertain regarding the rivals that each consumer considers, the equilibrium of the game in which ?rms choose the strategic variables sequentially is close to the equilibrium of the simultaneous game. Moreover, the equilibrium of the simultaneous game does not depend on whether or not consumers consider all available alternatives. Therefore, we argue that the analysis of these markets can be performed with standard models provided that the simultaneous timing is used (even if ?rms make their decisions sequentially).

Date: 2020
New Economics Papers: this item is included in nep-com, nep-gth and nep-mic
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