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When an Inefficient Competitor Makes Higher Profit than its Efficient Rival

12 Pages Posted: 7 Jan 2014  

Debapriya Sen

Ryerson University, Faculty of Arts - Department of Economics

Giorgos Stamatopoulos

University of Crete

Date Written: January 6, 2014

Abstract

We present examples of cost-asymmetric duopoly games where the inefficient firm can obtain higher payoff than its efficient rival. Firms compete in a Cournot fashion and their quantities are chosen by their managers. We assume that managers are offered two types of incentive contracts, the pure profit or the pure revenue contract. We allow for mixed and correlated strategies in the contract stage and derive the implications of the resulting choices. Surprisingly, we show that in equilibrium the less efficient firm can obtain higher market share and also higher profit than its more efficient rival. This result holds under both pure and mixed Nash equilibria and also under a robust set of correlated equilibria.

Keywords: managerial contract, cost asymmetry, mixed strategy

JEL Classification: D43, L13, L21

Suggested Citation

Sen, Debapriya and Stamatopoulos, Giorgos, When an Inefficient Competitor Makes Higher Profit than its Efficient Rival (January 6, 2014). Available at SSRN: https://ssrn.com/abstract=2375228 or http://dx.doi.org/10.2139/ssrn.2375228

Debapriya Sen

Ryerson University, Faculty of Arts - Department of Economics ( email )

Canada

Giorgos Stamatopoulos (Contact Author)

University of Crete ( email )

Rethymno, RETHIMNO GR-74100
Greece

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