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Confidence bias and advertising in imperfectly competitive markets

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  • Elizabeth Schroeder
  • Carol Horton Tremblay
  • Victor J. Tremblay

Abstract

The purpose of this paper is to investigate whether an owner can enhance corporate profit by delegating responsibility to a chief executive officer who has a biased view of his or her marketing ability. We develop a model of imperfect competition where firms compete in advertising and output. Before competition takes place, each owner makes a strategic decision whether to hire a manager who is overconfident, underconfident, or rationally confident in their marketing ability. In a strategic setting, the results reveal that it is never optimal for owners to hire managers who are rationally confident. Owners will hire managers who are either overconfident or underconfident, depending upon whether advertising is constructive or combative.

Suggested Citation

  • Elizabeth Schroeder & Carol Horton Tremblay & Victor J. Tremblay, 2021. "Confidence bias and advertising in imperfectly competitive markets," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(4), pages 885-897, June.
    • Handle: RePEc:wly:mgtdec:v:42:y:2021:i:4:p:885-897
    DOI: 10.1002/mde.3280
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    Cited by:

    1. Elizabeth Schroeder & Carol Horton Tremblay & Victor J. Tremblay, 2022. "CEO Bias and Product Substitutability in Oligopoly Games," Games, MDPI, vol. 13(2), pages 1-23, March.
    2. Jean‐Baptiste Tondji, 2022. "Overconfidence and welfare in a differentiated duopoly," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(3), pages 751-767, April.
    3. Yongyi Zhou & Yulin Zhang & Mark Goh, 2021. "Choice of pricing and advertising schemes for a two‐sided platform," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(7), pages 1865-1885, October.

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