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Multiproduct Duopoly with Vertical Differentiation

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Author Info

  • Cheng Yi-Ling

    ()
    (Tunghai University and Academia Sinica)

  • Peng Shin-Kun

    ()
    (Academia Sinica and National Taiwan University)

  • Tabuchi Takatoshi

    ()
    (University of Tokyo)

Abstract

This paper investigates a two-stage competition in a vertically differentiated industry, where each firm produces an arbitrary number of similar qualities and sells them to heterogeneous consumers. The number of products, qualities, prices, and the extent of the market coverage are endogenously determined. We show that when unit costs of quality improvement are increasing and quadratic, each firm has an incentive to provide a disconnected set of similar qualities approximating a continuum. The finding contrasts sharply with the single-quality outcome when the market coverage is exogenously determined. We also show that allowing for multiple qualities intensifies the level of competition, lowers the profit of each firm, and raises the consumer surplus and the social welfare in comparison to the single-quality duopoly.

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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Theoretical Economics.

Volume (Year): 11 (2011)
Issue (Month): 1 (August)
Pages: 1-29

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Handle: RePEc:bpj:bejtec:v:11:y:2011:i:1:n:16

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Cited by:
  1. Evdokia Dritsa & Eleftherios Zacharias, 2012. "Price Competition in a Duopoly Characterized by Positional Effects," Working Papers 12-21, NET Institute.

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