I thank Henrik Horn and Stefan Lundgren for many long and instructive discussions. I am grateful to Sonja Daltung, Tore Ellingsen, Peter Norman, and Katarina Richardson. I also thank the participants at the IIES workshop “Market Structure and the Internal Organization of Firms” and the participants at seminars at the Institute of Economics, University of Copenhagen, and the Institute for International Economic Studies for comments. Financial support from the Tore Browaldh, Jan Wallander, and Tom Hedelius Research Foundation is gratefully acknowledged.
Does Competition Make Firms More Flexible? A Study of Limited Managerial Cognition
Version of Record online: 13 JAN 2005
Journal of Economics & Management Strategy
Volume 3, Issue 2, pages 279–300, June 1994
How to Cite
Stennek, J. (1994), Does Competition Make Firms More Flexible? A Study of Limited Managerial Cognition. Journal of Economics & Management Strategy, 3: 279–300. doi: 10.1111/j.1430-9134.1994.00279.x
- Issue online: 13 JAN 2005
- Version of Record online: 13 JAN 2005
A model of procedural decision making in firms is combined with an oligopoly model to study the effect of limited managerial cognition on firm flexibility. It is argued that a firm may vary its flexibility, and, hence, that there exists a trade-off between decision-making costs and costs due to imperfect adjustment to the environment. The main conclusions are the following: (1) The level of flexibility chosen by firms tends to be too low, from a social welfare point of view. (2) Entry reduces firm flexibility. Aggregated flexibility in the market may, however, increase in which case consumers are unambiguously better off. (3) Integration of isolated markets increases firm flexibility and consumer welfare.