The Equivalence Between Sequential and Simultaneous Firm Decisions
Francisco Silva; Samir Mamadehussene
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).