CIRJE-F-332 "Inflexibility as a Stabilisation Device"
Author Name Akai, Nobuo and Dan Sasaki
Date March 2005
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A possible rationale for institutional conservatism, i.e., reluctance to adjust actions in accordance with external environmental changes, may be found in the payoff stabilisation effect it strategically affords. Suppose, for example, that one of the duopolists is capable of adjusting its action, either price or quantity, in response to unexpected demand fluctuations. Then the other duopolist, if incapable of such adjustments, recuperates some of the meager opportunities when the shock is negative whilst forgoing lucrative profit opportunities when the demand shock is positive, thereby "smoothes" its profits across varying states of demand in exchange for a small loss in expected profits, as opposed to when being as adjustable as its competitor. Similar qualitative results hold true both in Cournot and in Bertrand, and by extension, in a larger class of situations where economic decision makers interact through either strategic substitution or strategic complementarity.