Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

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Friday, July 16, 2010

When an inefficient firm makes higher profit than its efficient rival

Posted by D. Daniel Sokol

Debapriya Sen (Ryerson University) and Giorgos Stamatopoulos (University of Crete) explain When an inefficient firm makes higher profit than its efficient rival.

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.

http://lawprofessors.typepad.com/antitrustprof_blog/2010/07/when-an-inefficient-firm-makes-higher-profit-than-its-efficient-rival-.html

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