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When An Inefficient Firm Makes Higher Profit Than Its Efficient Rival

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Executive Summary

This paper considers a Cournot duopoly game with endogenous organization structures. There are two firms A and B who compete in the retail market, where A is more efficient than B. Prior to competition in the retail stage, firms simultaneously choose their organization structures which can be either 'Centralized' (one central unit chooses quantity to maximize firm's profit) or 'Decentralized' (the retail unit chooses quantity to maximize firm's revenue while the production unit supplies the required quantity). Identifying the (unique) Nash Equilibrium for every retail-stage subgame, the authors show that the reduced form game of organization choices is a potential game.

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