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Dynamic Retail Price and Investment Competition

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  • Kyle Bagwell
  • Garey Ramey
  • Daniel F. Spulber

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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Bibliographic 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

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  1. David M Kreps & Robert Wilson, 2003. "Sequential Equilibria," Levine's Working Paper Archive 618897000000000813, David K. Levine.
  2. Bagwell, Kyle, 1987. "Introductory Price as a Signal of Cost in a Model of Repeat Business," Review of Economic Studies, Wiley Blackwell, vol. 54(3), pages 365-84, July.
  3. 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.
  4. Stone, Kenneth E., 1991. "Competing with the Mass Merchandisers," Staff General Research Papers 11230, Iowa State University, Department of Economics.
  5. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September.
  6. Bagwell, Kyle, 1992. "A Model of Competitive Limit Pricing," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(4), pages 585-606, Winter.
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Citations

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Cited by:
  1. Harrington, Joseph Jr. & Chang, Myong-Hun, 2005. "Co-evolution of firms and consumers and the implications for market dominance," Journal of Economic Dynamics and Control, Elsevier, vol. 29(1-2), pages 245-276, January.
  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, revised 30 Sep 2010.
  3. Luis M. B. Cabral, 2000. "Dynamic Competition with No Efficiency Effect," Econometric Society World Congress 2000 Contributed Papers 0512, Econometric Society.
  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.
  5. Jeffrey R. Campbell & Hugo A. Hopenhayn, 2002. "Market Size Matters," NBER Working Papers 9113, National Bureau of Economic Research, Inc.
  6. Thomas J. Holmes, 1999. "Bar codes lead to frequent deliveries and superstores," Staff Report 261, Federal Reserve Bank of Minneapolis.
  7. Bernstein, Fernando & Federgruen, Awi, 2004. "Comparative statics, strategic complements and substitutes in oligopolies," Journal of Mathematical Economics, Elsevier, vol. 40(6), pages 713-746, September.
  8. Susan Athey & Armin Schmutzler, 2000. "Innovation and the Emergence of Market Dominance," Econometric Society World Congress 2000 Contributed Papers 1881, Econometric Society.
  9. Luis Cabral, 2000. "Increasing Dominance With No Efficiency Effect," Working Papers 00-06, New York University, Leonard N. Stern School of Business, Department of Economics.
  10. Antonio Falato & Dalida Kadyrzhanova, 2012. "Optimal CEO incentives and industry dynamics," Finance and Economics Discussion Series 2012-78, Board of Governors of the Federal Reserve System (U.S.).
  11. Dalida Kadyrzhanova, 2005. "Predatory Governance," Computing in Economics and Finance 2005 421, Society for Computational Economics.
  12. Emin M. Dinlersoz, 2000. "Firm Organization and Retail Industry Dynamics," Econometric Society World Congress 2000 Contributed Papers 0005, Econometric Society.

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