Competitive Analysis of Hierarchically Strategic Firms

Competitive Analysis of Hierarchically Strategic Firms
Research has suggested that managers may have different levels of strategic-reasoning capabilities. By incorporating hierarchical strategic capabilities into a duopoly model, we find that a less strategic firm may benefit from its limited strategic capability when competing with a more strategic firm. Interestingly, we found that firms with limited strategic capability will adopt the same pricing strategies as fully rational firms in equilibrium, providing certain supports for the validity of the traditional theoretical results. We also find that a strategic firm competing with a less strategic firm may get a higher profit than when competing with a strategic rival, suggesting a blessing effect of limited strategic capability for the market. Finally, in an innovative comparison, we find that the less strategic firm can earn a higher profit than a strategic counterpart with the same loyal share. A lab experiment provides empirical support for key theoretical predictions.