Does Competition Make Firms More Flexible? A Study of Limited Managerial Cognition

Posted: 13 Aug 2007

See all articles by Johan Stennek

Johan Stennek

Research Institute of Industrial Economics (IFN); Centre for Economic Policy Research (CEPR)

Abstract

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 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.

Keywords: cognition, procedural rationality, bounded rationality, competition

JEL Classification: D43, D80, L2, M1

Suggested Citation

Stennek, Johan, Does Competition Make Firms More Flexible? A Study of Limited Managerial Cognition. Journal of Economics & Management Strategy, Vol. 3, No. 2, pp. 279-300, Summer 1994, Available at SSRN: https://ssrn.com/abstract=1005662

Johan Stennek (Contact Author)

Research Institute of Industrial Economics (IFN) ( email )

P.O. Box 5501
S-114 85 Stockholm
Sweden
+46 8 665 4536 (Phone)
+46 8 665 4599 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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