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The Choice of Prices versus Quantities under Uncertainty
Author(s) -
Reisinger Markus,
Ressner Ludwig
Publication year - 2009
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.1530-9134.2009.00241.x
Subject(s) - duopoly , commit , economics , variable (mathematics) , microeconomics , competition (biology) , econometrics , degree (music) , cournot competition , mathematics , computer science , mathematical analysis , ecology , physics , database , acoustics , biology
This paper analyzes a duopoly model with stochastic demand in which firms first commit to a strategy variable and compete afterwards. We find that in equilibrium the relative magnitude of demand uncertainty and the degree of substitutability determines firms' variable choice. Firms set prices if uncertainty is high compared to the degree of substitutability and quantities if the reverse holds true. The reason is that demand uncertainty and the degree of substitutability have countervailing effects on variable choice: Prices adapt better to uncertainty while quantities induce softer competition. If no effect dominates, firms choose different strategy variables in equilibrium.

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