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Strategic Communication: Prices Versus Quantities

Author

Listed:
  • Ricardo Alonso
  • Wouter Dessein
  • Niko Matouschek

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 toward 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. (JEL: D21, D83, L20) (c) 2010 by the European Economic Association.

Suggested Citation

  • Ricardo Alonso & Wouter Dessein & Niko Matouschek, 2010. "Strategic Communication: Prices Versus Quantities," Journal of the European Economic Association, MIT Press, vol. 8(2-3), pages 365-376, 04-05.
    • Handle: RePEc:tpr:jeurec:v:8:y:2010:i:2-3:p:365-376
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    References listed on IDEAS

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    1. Ricardo Alonso & Wouter Dessein & Niko Matouschek, 2008. "When Does Coordination Require Centralization?," American Economic Review, American Economic Association, vol. 98(1), pages 145-179, March.
    2. Paul Klemperer & Margaret Meyer, 1986. "Price Competition vs. Quantity Competition: The Role of Uncertainty," RAND Journal of Economics, The RAND Corporation, vol. 17(4), pages 618-638, Winter.
    3. Crawford, Vincent P & Sobel, Joel, 1982. "Strategic Information Transmission," Econometrica, Econometric Society, vol. 50(6), pages 1431-1451, November.
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    Cited by:

    1. Irene Valsecchi, 2013. "The expert problem: a survey," Economics of Governance, Springer, vol. 14(4), pages 303-331, November.

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    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General

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