The Choice of Prices vs. Quantities under Uncertainty

Reisinger, Markus and Ressner, Ludwig (May 2007): The Choice of Prices vs. Quantities under Uncertainty. SFB/TR 15 Discussion Paper No. 202

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
• Keywords: competition, strategy variables, demand uncertainty
• Faculties: Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems; Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems > A4 - Unvollständige Verträge, Marktinteraktion und soziale Vergleichsprozesse; Economics; Economics > Chairs > Chair of Dynamic Economic Theory (closed)
• Subjects: 300 Social sciences > 330 Economics
• JEL Classification: D43, L13
• Language: English