Price Competition vs. Quantity Competition: The Role of Uncertainty

1985| Working Paper No. 825

We analyze the Nash equilibria of a one-stage game in which the nature of the strategic variables (prices or quantities) is determined endogenously. Duopolists producing differentiated products simultaneously choose either a quantity to produce or a price to charge. In the absence of exogenous uncertainty, there exist four types of equilibria (price, price),(quantity, quantity), (price, quantity), and (quantity, price) - and output levels differ across the equilibria. The multiplicity stems from each firms indifference between setting price and quantity, given its conjecture about its rivals strategy. Exogenous uncertainty about market demands makes firms uncertain about their residual demands, even in equilibrium. This gives firms strict preferences between setting price and quantity. As a result, the number of equilibria is reduced. In a setting with exogenous uncertainty, we analyze the effect of the slope of marginal costs, the nature of the demand disturbance, and the curvature of demand on firms propensity to compete with price or quantity as a strategic variable. Consideration of firms response to exogenous uncertainty thus suggests three factors which are likely to influence the nature and intensity of oligopolistic competition.