Abstract

<p>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.</p>

Highlights

  • Consider the market for a good where two firms with different marginal costs compete in a duopoly

  • This paper shows that when organization structure of competing firms is endogenized, the standard result can be reversed in that situations could arise in a duopoly where the less efficient firm obtains a higher profit than its more efficient rival

  • The organization structures that we study naturally follow from these two basic units: a centralized structure has production and sales working as one unit, while for a decentralized structure, they are separate

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Summary

Introduction

Consider the market for a good where two firms with different marginal costs compete in a duopoly. If in response to B’s choice of decentralized structure, A chooses to be decentralized, both firms supply a high quantity in the retail market that results in a low price. Firm B can improve its profit by deviating to the decentralized structure that results in lower price This explains that A’s choice to be centralized and B’s to be decentralized can be sustained as an equilibrium when the market size is intermediate, i.e., it is not too large or too small. Our result that a less efficient firm can obtain higher profit under endogenous organization structures is in contrast with the conclusion of the existing literature, where the less efficient firm always makes lower profit under the incentive equilibrium (Fershtman and Judd).

The model
The game Γ
Stage 2 of Γ
Stage 1 of Γ
The main result
Γ∗ is a potential game
Concluding remarks
Full Text
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