Strategic Communication: Prices Versus Quantities
Journal of the European Economic Association, Vol. 8, No. 2-3, pp. 365-376, 2010
12 Pages Posted: 22 Oct 2011
Date Written: April 2010
We examine how cheap talk communication between managers within the same firm depends on the type of decisions that the firm makes. A firm consists of a headquarters and two operating divisions. Headquarters is unbiased but does not know the demand conditions in the divisions’ markets. Each division manager knows the demand conditions in his market but is also biased towards his division. The division managers communicate with headquarters, which then sets either the prices or quantities for each division. The quality of communication depends on whether headquarters sets prices or quantities. This is the case even though, once communication has taken place, expected profits are the same whether headquarters sets prices or quantities.
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