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Product and Price Competition in a Two-Dimensional Vertical Differentiation Model

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Author Info

  • Mark B. Vandenbosch

    (The University of Western Ontario)

  • Charles B. Weinberg

    (The University of British Columbia)

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    Abstract

    In this paper, the one-dimensional vertical differentiation model (Shaked and Sutton [Shaked, A., J. Sutton. 1982. Relaxing price competition through product differentiation. 3–13.], Moorthy [Moorthy, K. S. 1988. Product and price competition in a Duopoly. (Spring) 141–168.]) is extended to two dimensions and an analysis of product and price competition is presented. A two-stage game theoretic analysis in which two firms compete first on product positions and then on price is conducted. Closed form equilibrium solutions are obtained for each stage in which competitors are unrestricted in their choices of price or product positions. A significant finding of this research is that unlike the one-dimensional vertical differentiation model, firms do not tend towards maximum differentiation, although this solution is possible under certain conditions. When the range of positioning options on each of the dimensions is equal, MaxMin product differentiation occurs. That is, in equilibrium, the two firms tend to choose positions which will represent maximum differentiation on one dimension and minimum differentiation on the other dimension.

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    File URL: http://dx.doi.org/10.1287/mksc.14.2.224
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    Bibliographic Info

    Article provided by INFORMS in its journal Marketing Science.

    Volume (Year): 14 (1995)
    Issue (Month): 2 ()
    Pages: 224-249

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    Handle: RePEc:inm:ormksc:v:14:y:1995:i:2:p:224-249

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    Related research

    Keywords: competitive strategy; game theory; product policy; pricing research;

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    Cited by:
    1. Degryse, Hans & Irmen, Andreas, 1997. "Attribute Dependence and the Provision of Quality," CEPR Discussion Papers 1635, C.E.P.R. Discussion Papers.
    2. Stefan Buehler & Daniel Halbheer, 2011. "Persuading Consumers with Social Attitudes," CESifo Working Paper Series 3470, CESifo Group Munich.
    3. Ansari, A. & Economides, N. & Steckel, J., 1996. "The Max-Min-Min Principle of product Differentiation," Working Papers 96-10, New York University, Leonard N. Stern School of Business, Department of Economics.
    4. 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).
    5. Garella, Paolo G. & Lambertini, Luca, 2014. "Bidimensional vertical differentiation," International Journal of Industrial Organization, Elsevier, vol. 32(C), pages 1-10.
    6. P. G. Garella & L. Lambertini, 2008. "Bidimensional quality competition and scope economies," Working Papers 653, Dipartimento Scienze Economiche, Universita' di Bologna.
    7. Mangani, Andrea, 2003. "Profit and audience maximization in broadcasting markets," Information Economics and Policy, Elsevier, vol. 15(3), pages 305-315, September.
    8. Degryse, H.A. & Irmen, A., 1998. "On the incentives to provide fuel-efficient automobiles," Discussion Paper 1998-48, Tilburg University, Center for Economic Research.
    9. Rex Du & Eunkyu Lee & Richard Staelin, 2005. "Bridge, Focus, Attack, or Stimulate: Retail Category Management Strategies with a Store Brand," Quantitative Marketing and Economics, Springer, vol. 3(4), pages 393-418, December.
    10. Andrea Mangani & Paolo Patelli, 2002. "The Max-Min Principle of Product Differentiation: An Experimental Analysis," LEM Papers Series 2002/05, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    11. Lacourbe, Paul, 2012. "A model of product line design and introduction sequence with reservation utility," European Journal of Operational Research, Elsevier, vol. 220(2), pages 338-348.

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