When an inefficient competitor makes higher profit than its efficient rival

Sen, Debapriya and Stamatopoulos, Giorgos (2010): When an inefficient competitor makes higher profit than its efficient rival.

Abstract

We consider a Cournot duopoly with strategic delegation, where quantities of firms are chosen by their managers. A firm can offer its manager one of the two incentive contracts: the profit incentive or the revenue incentive. We show that in this setting there are Nash equilibria in which an inefficient firm obtains higher profit than its efficient rival. This result continues to hold under a robust set of correlated equilibria.

• Item Type: MPRA Paper
• Language: English
• Keywords: duopoly; managerial contract; Nash equilibrium; correlated equilibrium; anticoordination games
• Subjects: L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L21 - Business Objectives of the Firm; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D43 - Oligopoly and Other Forms of Market Imperfection; C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C72 - Noncooperative Games

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