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Endogenous Timing in Quality Investments and Price Competition

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  • L. Lambertini
  • A. Tampieri

Abstract

We modify the price-setting version of the vertically differentiated duopoly model by Aoki (2003) by introducing an extended game in which firms noncooperatively choose the timing of moves at the quality stage. Our results show that there are multiple equilibria in pure strategies, in which firms always select sequential play at the quality stage. We also investigate the mixed-strategy equilibrium, revealing that the probability of generating outcomes out of equilibrium is higher than its complement to one. In the alternative of full market coverage, we show that the quality stage is solved in dominant strategies and therefore the choice of roles becomes irrelevant as the Nash and Stackelberg solutions coincide.

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Paper provided by Dipartimento Scienze Economiche, Universita' di Bologna in its series Working Papers with number wp815.

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Date of creation: Mar 2012
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Handle: RePEc:bol:bodewp:wp815

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  1. Hamilton, Jonathan H. & Slutsky, Steven M., 1990. "Endogenous timing in duopoly games: Stackelberg or cournot equilibria," Games and Economic Behavior, Elsevier, Elsevier, vol. 2(1), pages 29-46, March.
  2. L. Lambertini & A. Tampieri, 2011. "Low-Quality Leadership in a Vertically Differentiated Duopoly with Cournot Competition," Working Papers wp750, Dipartimento Scienze Economiche, Universita' di Bologna.
  3. d'ASPREMONT, C. & GERARD-VARET, L.-A., . "Stackelberg-solvable games and pre-play communication," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -425, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Reiko Aoki, 2003. "Effect of credible quality investment with Bertrand and Cournot competition," Economic Theory, Springer, Springer, vol. 21(2), pages 653-672, 03.
  5. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 93(3), pages 488-511, June.
  6. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, Elsevier, vol. 18(2), pages 301-317, August.
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