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Bertrand Supertraps

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Author Info

  • Luís M. B. Cabral

    ()
    (Stern School of Business, New York University, New York, New York 10012)

  • Miguel Villas-Boas

    ()
    (Haas School of Business, University of California, Berkeley, California 94720)

Abstract

We study oligopoly price competition between multiproduct firms---firms whose products interact in the profit function. Specifically, we focus on the impact of intrafirm product interactions on the level of equilibrium profits. This impact may be decomposed in two different ways: (a) a direct effect (keeping the competitors' actions fixed) plus a strategic effect (i.e., through the competitors' actions); or, alternatively, (b) a competitive advantage effect (change in firm i only) plus an imitation effect (change in all other firms). We derive conditions such that (a) the strategic effect more than outweighs the direct effect, and conditions such that (b) the imitation effect more than outweighs the competitive advantage effect: Bertrand supertraps. For example, an increase in the degree of economies of scope would increase profits if prices were fixed or if the change were limited to firm i's cost function. However, if all firms increase the degree of economies of scope then all firms receive lower profits. A variety of other applications is considered, including learning curves, core competencies, demand synergies, systems competition, compatibility, bundling, network effects, switching costs, durable goods, long-term contracts.

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File URL: http://dx.doi.org/10.1287/mnsc.1040.0313
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Bibliographic Info

Article provided by INFORMS in its journal Management Science.

Volume (Year): 51 (2005)
Issue (Month): 4 (April)
Pages: 599-613

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Handle: RePEc:inm:ormnsc:v:51:y:2005:i:4:p:599-613

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Keywords: competition; strategic complementarity; economies of scope; learning curves; core competencies; demand synergies; systems competition; compatibility; bundling; network effects; switching costs; durable goods; long-term contracts;

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Cited by:
  1. X. Wang & Jingang Zhao, 2010. "Why are firms sometimes unwilling to reduce costs?," Journal of Economics, Springer, vol. 101(2), pages 103-124, October.
  2. Cabral, Luís M B, 2008. "Dynamic Price Competition with Network Effects," CEPR Discussion Papers 6687, C.E.P.R. Discussion Papers.
  3. Vives, Xavier, 2005. "Games with strategic complementarities: New applications to industrial organization," International Journal of Industrial Organization, Elsevier, vol. 23(7-8), pages 625-637, September.
  4. Luís Cabral, 2002. "Comments on Clemons, Hitt, Gu, Thatcher, and Weber," Journal of Financial Services Research, Springer, vol. 22(1), pages 91-93, August.
  5. Karlsson, Martin, 2007. "Quality incentives for GPs in a regulated market," Journal of Health Economics, Elsevier, vol. 26(4), pages 699-720, July.

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