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D oes C ompetition M ake F irms M ore F lexible ? A S tudy of L imited M anagerial C ognition
Author(s) -
Stennek Johan
Publication year - 1994
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/j.1430-9134.1994.00279.x
Subject(s) - flexibility (engineering) , oligopoly , industrial organization , microeconomics , competition (biology) , imperfect competition , welfare , imperfect , point (geometry) , business , economics , social welfare , cournot competition , market economy , philosophy , geometry , mathematics , management , political science , law , biology , ecology , linguistics
A model of procedural decision making in firms is combined with an oligopoly model to study the effect of limited managerial cognition on firm flexibility. It is argued that a firm may vary its flexibility, and, hence, that there exists a trade‐off between decision‐making costs and costs due to imperfect adjustment to the environment. The main conclusions are the following: (1) The level of flexibility chosen by firms tends to be too low, from a social welfare point of view. (2) Entry reduces firm flexibility. Aggregated flexibility in the market may, however, increase in which case consumers are unambiguously better off. (3) Integration of isolated markets increases firm flexibility and consumer welfare.