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A limit to price-increasing competition

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Author Info

  • Roessler, Christian

Abstract

Differentiated entry may cause an incumbent firm to increase its price if the entering brand attracts price-sensitive consumers. This paper generalizes from the known cases with one-dimensional and two-dimensional products, showing for a finite number of attributes that there is scope for price-increasing competition, depending on the entrant’s product positioning. The extension is critical because it leads to a reversal that has not been considered. The highest possible duopoly price converges to the monopoly price as the dimensionality increases. Intuitively, when the product is more complex, tastes in the intersection of two brand markets (at any prices) are more specific and less frequent. This thinning of the fringe diminishes the effect of competitive entry.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Mathematical Economics.

Volume (Year): 48 (2012)
Issue (Month): 2 ()
Pages: 65-76

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Handle: RePEc:eee:mateco:v:48:y:2012:i:2:p:65-76

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Web page: http://www.elsevier.com/locate/jmateco

Related research

Keywords: Price-increasing competition; Differentiated products; Multidimensional spatial analysis;

References

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  1. Irmen, A. & Thisse, J.-F., . "Competition in multi-characteristics spaces: Hotelling was almost right," CORE Discussion Papers RP -1305, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Michael H. Riordan & Yongmin Chen, 2005. "Price and Variety in the Spokes Model," Discussion Papers 0405-20, Columbia University, Department of Economics.
  3. Feenstra, Robert C & Levinsohn, James A, 1995. "Estimating Markups and Market Conduct with Multidimensional Product Attributes," Review of Economic Studies, Wiley Blackwell, vol. 62(1), pages 19-52, January.
  4. Ohta, Hiroshi, 1981. "The Price Effects of Spatial Competition," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 317-25, April.
  5. Helge Sanner, 2005. "Price Responses to Market Entry With and Without Endogenous Product Choice," Volkswirtschaftliche Diskussionsbeiträge 81, Universität Potsdam, Wirtschafts- und Sozialwissenschaftliche Fakultät.
  6. Yongmin Chen & Michael H. Riordan, 2008. "Price-increasing competition," RAND Journal of Economics, RAND Corporation, vol. 39(4), pages 1042-1058.
  7. Greenhut, M L & Hwang, M & Ohta, H, 1975. "Observations on the Shape and Relevance of the Spatial Demand Function," Econometrica, Econometric Society, vol. 43(4), pages 669-82, July.
  8. Greenhut,Melvin L. & Norman,George & Hung,Chao-Shun, 1987. "The Economics of Imperfect Competition," Cambridge Books, Cambridge University Press, number 9780521315647, October.
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Cited by:
  1. Liu, Qihong & Shuai, Jie, 2013. "Multi-dimensional price discrimination," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 417-428.

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