Irrelevance of the choice of strategic variables in duopoly under relative profit maximization

Authors

  • Yasuhito Tanaka Faculty of Economics, Doshisha University, Japan

DOI:

https://doi.org/10.17811/ebl.2.2.2013.75-83

Abstract

We study the choice of strategic variables by firms in a duopoly in which two firms produce differentiated substitutable goods and each firm maximizes its relative profit that is the difference between its profit and the profit of the rival firm. We consider a two stage game such that in the first stage the firms choose their strategic variables and in the second stage they determine the values of their strategic variables. We show that when the firms maximize their relative profits, the choice of strategic variables is irrelevant to the outcome of the game in the sense that the equilibrium outputs, prices and profits of the firms are the same in all situations, and so any combination of strategy choice by the firms constitutes a sub-game perfect equilibrium in the two stage game. We assume that demand functions for the goods are symmetric and linear, the marginal costs of the firms are common and constant, and the fixed costs are zero.

References

Bolton, G.E. and Ockenfels, A. (2000) A theory of equity, reciprocity, and competition, American Economic Review, 90, 166-193.

Gibbons, R. and Murphy, K.J. (1990) Relative performance evaluation for chief executive officers, Industrial and Labor Relations Review, 43, 30S-51S.

Kockesen, L., Ok, E.A. and Sethi, R. (2000) The strategic advantage of negatively interdependent preferences, Journal of Economic Theory, 92, 274-299.

Lundgren, C. (1996) Using relative profit incentives to prevent collusion, Review of Industrial Organization, 11, 533-550.

Matsumura, T., Matsushima, N. and Cato, S. (2009) Relative performance and R&D competition, ISER Discussion Paper 0752, Institute of Social and Economic Research, Osaka University.

Schaffer, M.E. (1989) Are profit maximizers the best survivors?, Journal of Economic Behavior and Organization, 12, 29-45.

Tanaka, Y. (2013) Equivalence of Cournot and Bertrand equilibria in differentiated duopoly under relative profit maximization with linear demand”, mimeo.

Vega-Redondo, F. (1997) The evolution of Walrasian behavior, Econometrica, 65, 375-384.

Downloads

Published

17-06-2013

How to Cite

Tanaka, Y. (2013). Irrelevance of the choice of strategic variables in duopoly under relative profit maximization. Economics and Business Letters, 2(2), 75–83. https://doi.org/10.17811/ebl.2.2.2013.75-83

Issue

Section

Articles