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  3. The Equivalence Between Sequential and Simultaneous Firm Decisions


Documento de trabajo

The Equivalence Between Sequential and Simultaneous Firm Decisions

  • person

    Francisco Silva; 

    Samir Mamadehussene

  • class Documento de Trabajo IE-PUC, N° 541 2019

Abstract: When firms compete by choosing two strategic variables (e.g. quality and price), the timing under which firms make their decisions (simultaneous vs sequential choice of the strategic variables) plays a critical role, as the equilibrium may be drastically different depending on the timing that is assumed. We rely on the marketing and psychology literatures that provide well-established evidence that consumers do not consider all products in a market, i.e. consumers form “consideration sets”. Under this assumption, we find that in markets where (i) firms’ strategies do not influence the consideration set formation, and (ii) firms are sufficiently uncertain regarding the rivals that each consumer considers, the equilibrium of the game in which firms choose the strategic variables sequentially is close to the equilibrium of the simultaneous game. Moreover, the equilibrium of the simultaneous game does not depend on whether or not consumers consider all available alternatives. Therefore, we argue that the analysis of these markets can be performed with standard models provided that the simultaneous timing is used (even if firms make their decisions sequentially).