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Dynamic Retail Price and Investment Competition

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Author Info
Kyle Bagwell
Garey Ramey
Daniel F. Spulber

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Abstract

We develop a model of retail competition in which retailers select prices and investments in cost reduction. An equilibrium is constructed in which several identical firms enter and then engage in a phase of vigorous price competition. This phase is concluded with a "shakeout," as a low-price, low-cost firm comes to dominate the market. A central feature of the equilibrium is that low prices are complementary with large investments in cost reduction. Even though the dominant firm's price rises through time, and initially may be below marginal cost, we argue that an interpretation of predatory pricing may be inappropriate.

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File URL: http://links.jstor.org/sici?sici=0741-6261%28199722%2928%3A2%3C207%3ADRPAIC%3E2.0.CO%3B2-1&origin=repec
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Publisher Info
Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 28 (1997)
Issue (Month): 2 (Summer)
Pages: 207-227
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Handle: RePEc:rje:randje:v:28:y:1997:i:summer:p:207-227

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Kyle Bagwell & Garey Ramey, 1992. "The Diamond Paradox: A Dynamic Resolution," Discussion Papers 1013, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
    Other versions:
  2. Bagwell, Kyle, 1987. "Introductory Price as a Signal of Cost in a Model of Repeat Business," Review of Economic Studies, Blackwell Publishing, vol. 54(3), pages 365-84, July. [Downloadable!] (restricted)
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  3. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September. [Downloadable!] (restricted)
  4. Kreps, David M & Wilson, Robert, 1982. "Sequential Equilibria," Econometrica, Econometric Society, vol. 50(4), pages 863-94, July. [Downloadable!] (restricted)
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  5. Bagwell, Kyle, 1992. "A Model of Competitive Limit Pricing," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 1(4), pages 585-606, Winter.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Thomas J. Holmes, 1999. "Bar codes lead to frequent deliveries and superstores," Staff Report 261, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  2. Emek Basker & Shawn Klimek & Pham Hoang Van, 2008. "Supersize It: The Growth of Retail Chains and the Rise of the "Big Box" Retail Format," Working Papers 0809, Department of Economics, University of Missouri. [Downloadable!]
    Other versions:
  3. Emin M. Dinlersoz, 2000. "Firm Organization and Retail Industry Dynamics," Econometric Society World Congress 2000 Contributed Papers 0005, Econometric Society. [Downloadable!]
  4. Ronald Jarmin & Shawn Klimek & Javier Miranda, 2005. "The Role of Retail Chains: National, Regional, and Industry Results," Working Papers 05-30, Center for Economic Studies, U.S. Census Bureau. [Downloadable!]
  5. Pedro Pereira, 2004. "Some implications of search and switching costs for the price dynamics of electronic markets," International Journal of the Economics of Business, Taylor and Francis Journals, vol. 11(3), pages 303-327, November. [Downloadable!] (restricted)
  6. Dalida Kadyrzhanova, 2005. "Predatory Governance," Computing in Economics and Finance 2005 421, Society for Computational Economics. [Downloadable!]
  7. Jeffrey R. Campbell & Hugo Hopenhayn, 2003. "Market size matters," Working Paper Series WP-03-12, Federal Reserve Bank of Chicago. [Downloadable!]
    Other versions:
  8. Emek Basker & Pham Hoang Van, 2005. "Putting a Smiley Face on the Dragon: Wal-Mart as Catalyst to U.S.-China Trade," Working Papers 0506, Department of Economics, University of Missouri, revised 07 Oct 2005. [Downloadable!]
  9. Luis M. B. Cabral, 2000. "Dynamic Competition with No Efficiency Effect," Econometric Society World Congress 2000 Contributed Papers 0512, Econometric Society. [Downloadable!]
  10. Susan Athey & Armin Schmutzler, 1999. "Innovation and the Emergence of Market Dominance," Working Papers 9906, University of Zurich, Socioeconomic Institute. [Downloadable!]
    Other versions:
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