Managerial Belief Bias and Risk Preference in Price–Quality Competition: A Game-Theoretic Analysis

Managerial belief bias and risk preference shape strategic decisions through different channels: beliefs affect perceived consumer valuations, whereas risk preference affects the valuation of profit volatility. We develop a differentiated-duopoly model in which firms choose quality before competing in prices. One manager may hold an optimistic or pessimistic assessment of consumers’ willingness to pay and exhibit risk-seeking, risk-neutral, or risk-averse preferences; the rival holds unbiased beliefs and is risk-neutral. Under simultaneous pricing, the biased firm’s price increases with its willingness-to-pay assessment, while the rival’s price may respond non-monotonically. Relative to the unbiased benchmark, either direction of nonzero belief bias raises the biased firm’s unit margin but reduces its actual expected demand. The rival benefits from every nonzero admissible bias. Both firms gain when the biased manager is risk-averse and the distortion is sufficiently small relative to the degree of risk aversion. Under risk neutrality or risk seeking, bias reduces the focal firm’s actual expected profit. Sequential-pricing extensions show that managerial characteristics can reverse leader–follower profit rankings. The price leader earns more than the follower over an intermediate range of risk aversion, while sufficiently large admissible belief distortions reverse the biased follower’s profit advantage under risk neutrality. These findings identify risk preference as a condition governing the profitability of biased beliefs and explain how managerial heterogeneity shapes price–quality decisions and competitive spillovers.