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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. Bagwell, Kyle, 1987. "Introductory Price as a Signal of Cost in a Model of Repeat Business," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 54(3), pages 365-84, July.
  2. Kreps, David M & Wilson, Robert, 1982. "Sequential Equilibria," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 863-94, July.
  3. Stone, Kenneth E., 1991. "Competing with the Mass Merchandisers," Staff General Research Papers, Iowa State University, Department of Economics 11230, Iowa State University, Department of Economics.
  4. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, American Economic Association, vol. 70(4), pages 651-59, September.
  5. Bagwell, Kyle, 1992. "A Model of Competitive Limit Pricing," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 1(4), pages 585-606, Winter.
  6. Kyle Bagwell & Garey Ramey, 1992. "The Diamond Paradox: A Dynamic Resolution," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 1013, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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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, Elsevier, vol. 29(1-2), pages 245-276, January.
  2. Holmes, Thomas J, 2001. "Bar Codes Lead to Frequent Deliveries and Superstores," RAND Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 32(4), pages 708-25, Winter.
  3. Dalida Kadyrzhanova, 2005. "Predatory Governance," Computing in Economics and Finance 2005, Society for Computational Economics 421, Society for Computational Economics.
  4. Jeffrey R. Campbell & Hugo Hopenhayn, 2003. "Market size matters," Working Paper Series, Federal Reserve Bank of Chicago WP-03-12, Federal Reserve Bank of Chicago.
  5. Bernstein, Fernando & Federgruen, Awi, 2004. "Comparative statics, strategic complements and substitutes in oligopolies," Journal of Mathematical Economics, Elsevier, Elsevier, vol. 40(6), pages 713-746, September.
  6. 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, Department of Economics, University of Missouri 0809, Department of Economics, University of Missouri, revised 30 Sep 2010.
  7. Ronald Jarmin & Shawn Klimek & Javier Miranda, 2005. "The Role of Retail Chains: National, Regional, and Industry Results," Working Papers, Center for Economic Studies, U.S. Census Bureau 05-30, Center for Economic Studies, U.S. Census Bureau.
  8. Emin M. Dinlersoz, 2000. "Firm Organization and Retail Industry Dynamics," Econometric Society World Congress 2000 Contributed Papers, Econometric Society 0005, Econometric Society.
  9. Cabral, L., 2000. "Increasing Dominance with No Efficiency Effect," New York University, Leonard N. Stern School Finance Department Working Paper Seires, New York University, Leonard N. Stern School of Business- 00-06, New York University, Leonard N. Stern School of Business-.
  10. Susan Athey & Armin Schmutzler, 1999. "Innovation and the Emergence of Market Dominance," SOI - Working Papers, Socioeconomic Institute - University of Zurich 9906, Socioeconomic Institute - University of Zurich.
  11. Antonio Falato & Dalida Kadyrzhanova, 2012. "Optimal CEO incentives and industry dynamics," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2012-78, Board of Governors of the Federal Reserve System (U.S.).
  12. Luis M. B. Cabral, 2000. "Dynamic Competition with No Efficiency Effect," Econometric Society World Congress 2000 Contributed Papers, Econometric Society 0512, Econometric Society.

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