The Choice of Prices vs. Quantities under Uncertainty

This paper analyzes a duopoly model with stochastic demand in which firms first commit to a strategy variable and compete afterwards. We find that in equi-librium the relative magnitude of demand uncertainty and the degree of substi-tutability determines firms ’ variable choice. Firms commit to prices if demand uncertainty is high compared to the degree of substitutability and to quantities if the reverse holds true. The reason for this result is that demand uncertainty and the degree of substitutability have countervailing effects on variable choice: Prices adapt better to uncertainty while quantities induce softer competition. If no effect dominates, firms choose different strategy variables in equilibrium. JEL classification: D43, L1