Friday, November 27, 2015
ABSTRACT: Do firms under relative payoffs maximizing (RPM) behavior always choose a strategy profile that results in tougher competition compared to firms under absolute payoffs maximizing (APM) behavior? In this paper we will address this issue through a simple model of symmetric oligopoly where firms select a two dimensional strategy set of price and a non-price variable known as quality simultaneously. In conclusion, our results show that equilibrium solutions of RPM and APM are distinct. We further characterize the comparison between these two equilibrium concepts. In particular, RPM does not always lead to stricter competition compared to the Nash equilbrium (APM). In fact, the comparison between two equilibrium concepts is influenced by the parameters of demand curve and cost function. The conditions, derived in this paper, determine under which circumstances RPM induces more competition or less competition w.r.t the price or non-price dimension.