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Firm governance and duopoly: in weakness may lie strength
Author(s) -
Brady Malcolm P.
Publication year - 2007
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.1318
Subject(s) - profit maximization , microeconomics , cournot competition , duopoly , corporate governance , economics , stackelberg competition , maximization , profit (economics) , industrial organization , business , finance
The paper proposes a model of firm governance when two firms compete in a duopoly. The paper assumes that a motivational asymmetry exists between owners and managers: owners wish to obtain maximum profits, managers wish to maximize sales. Managers perceive that salary, social status or future job prospects are more closely associated with firm size (i.e. sales) than with firm profits. The paper takes an agency view of the firm where owners only indirectly influence the behaviour of firms through the level of control they exert over managers. The paper demonstrates that a weakly governed firm, acting as a sales maximizer, can gain a competitive advantage over a strongly governed firm, acting as a profit maximizer. The paper examines the extent of this advantage under cost leadership and differentiation strategies. The paper also demonstrates that the objectives of profit maximization and maximization of competitive advantage are not necessarily congruent. The paper graphically represents the profit functions of the two firms illustrating the Nash equilibrium under Cournot and Stackelberg conditions. Copyright © 2007 John Wiley & Sons, Ltd.