Firm dynamics and employee performance management in duopoly markets

Abstract The effects of the Peter Principle (PP) on a hierarchical firm have been extensively studied, but existing firm models fail to capture real-world firm dynamics such as employee motivation and CEO characteristics. We thus extend an existing firm model to introduce the notion of employee motivation and a CEO agent with parameters for leadership and managerial qualities, and incorporate the vitality curve. Through our experiments, we show that a firm’s performance depends on the characteristics of the CEO agent, as observed in reality. We run simulations for a firm model under two hypotheses: when a firm is subject to PP and when it is not. We find that a non-standard vitality curve setting leads to an efficiency gain over the standard one. We also study the effects of PP on firms competing in Stackelberg and Cournot games. We find that there exists a possibility for a follower firm to overtake a leader firm in a Stackelberg game when the leader is subject to PP. In a Cournot game, we find that a firm that is not subject to PP produces more quantity and makes more profit compared to a firm that is.