Strategic Communication: Prices Versus Quantities

Journal of the European Economic Association, Vol. 8, No. 2-3, pp. 365-376, 2010

Columbia Business School Research Paper No. 11-33

12 Pages Posted: 22 Oct 2011

See all articles by Ricardo Alonso

Ricardo Alonso

London School of Economics & Political Science (LSE) - Department of Management

Wouter Dessein

Columbia Business School - Finance and Economics

Niko Matouschek

Northwestern University - Kellogg School of Management; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Date Written: April 2010

Abstract

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.

Suggested Citation

Alonso, Ricardo and Dessein, Wouter and Matouschek, Niko, Strategic Communication: Prices Versus Quantities (April 2010). Journal of the European Economic Association, Vol. 8, No. 2-3, pp. 365-376, 2010, Columbia Business School Research Paper No. 11-33, Available at SSRN: https://ssrn.com/abstract=1946994

Ricardo Alonso

London School of Economics & Political Science (LSE) - Department of Management ( email )

United Kingdom

HOME PAGE: http://www.lse.ac.uk/management/people/ralonso.aspx

Wouter Dessein (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Niko Matouschek

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-4166 (Phone)
847-467-1777 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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