Management contracts and competition in prices or quantities as strategic tools for differentiated duopoly

This article analyzes a differentiated duopoly, in which each business use twos strategic tools to compete with its rival: management incentive contracts, and a choice between prices and quantities. Using the non-cooperative game theory, it is found in equilibrium that (i) when the businesses (i) do not hire managers with substitute (complementary) price contracts are the dominant strategy; with complementary items, quantity (price) contracts become the dominant strategy; (ii) when the companies can choose whether to hire managers for substitute or complementary goods, price contracts are the dominant strategy; (iii) when they can choose whether to hire managers, and agree with consumers, with substituted goods, one of the companies hires a manager and selects quantities, and the other does not hire, and selects quantities or prices; when they are complementary, both hire a manager and choose prices, and (iv) The greatest levels of social welfare is obtained when the businesses do not hire managers and make price contracts. However, the social welfare associated with the results of equilibrium is, in all cases, lower than optimum.