Price Competition in a Duopoly Characterized by Positional Effects
AbstractWe examine the price decisions in a vertically differentiated duopoly where the decision to buy a good depends not only upon the intrinsic utility from consuming it but also upon the social attributes (prestige, uniqueness etc.) associated with its consumption. These social attributes are especially important in vertically differentiated markets. We show that when these attributes are not very strong, if their intensity increases, the profits of both firms increase. However, when these attributes are very important, if their intensity increases, the profits of the firm that offers a lower quality variant increase whereas the profits of the firm that offers the higher quality variant decrease. Our results have implications on the amount of persuasive advertising firms should conduct in such markets.
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Bibliographic InfoPaper provided by NET Institute in its series Working Papers with number 12-21.
Length: 17 pages
Date of creation: Oct 2012
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Vertical differentiation; positional externalities; snob effect; bandwagon effect.;
Find related papers by JEL classification:
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-10-27 (All new papers)
- NEP-BEC-2012-10-27 (Business Economics)
- NEP-COM-2012-10-27 (Industrial Competition)
- NEP-IND-2012-10-27 (Industrial Organization)
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