When an inefficient firm makes higher profit than its efficient rival

Debapriya Sen and Giorgos Stamatopoulos

MPRA Paper from University Library of Munich, Germany

Abstract: This paper considers a Cournot duopoly game with endogenous organization structures. There are two firms A and B who compete in the retail market, where A is more efficient than B. Prior to competition in the retail stage, firms simultaneously choose their organization structures which can be either 'centralized' (one central unit chooses quantity to maximize firm's profit) or 'decentralized' (the retail unit chooses quantity to maximize firm's revenue while the production unit supplies the required quantity). Identifying the (unique) Nash Equilibrium for every retail-stage subgame, we show that the reduced form game of organization choices is a potential game. The main result is that with endogenous organization structures, situations could arise where the less efficient firm B obtains a higher profit than its more efficient rival A.

Keywords: Centralized structure; decentralized structure; potential games (search for similar items in EconPapers)
JEL-codes: C72 D43 L13 L21 (search for similar items in EconPapers)
Date: 2010-06-16
New Economics Papers: this item is included in nep-bec and nep-com
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Citations: View citations in EconPapers (3)

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https://mpra.ub.uni-muenchen.de/59639/8/MPRA_paper_59639.pdf revised version (application/pdf)

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