The Choice of Prices vs. Quantities under Uncertainty

Reisinger, Markus and Reßner, Ludwig (2007): The Choice of Prices vs. Quantities under Uncertainty. Discussion Papers in Economics 2007-14

Abstract

This paper analyzes a duopoly model with stochastic demand in which firms first choose their strategy variable and compete afterwards. Contrary to the existing literature, we show that firms do not always choose a quantity which is the variable that induces a smaller degree of competition. The reason is that demand uncertainty and the degree of substitutability have countervailing effects on variable choice. Higher uncertainty favors prices, while closer substitutability favors quantities. Moreover, for intermediate values firms choose different strategy variables in equilibrium.

• Item Type: Paper (Discussion Paper)
• Keywords: Competition; Strategy Variables; Demand Uncertainty
• Collections: Economics; Economics > Discussion Papers in Economics; Economics > Discussion Papers in Economics > Industrial Organization
• Subjects: 300 Social sciences > 300 Social sciences, sociology and anthropology; 300 Social sciences > 330 Economics
• JEL Classification: D43, L13
• Language: English