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Pricing Interrelated Goods in Oligopoly

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  • Sandro Shelegia

    ()
    (Department of Economics and Business Universitat Pompeu Fabra)

Abstract

In this paper we propose a two-good model of price competition in an oligopoly where the two goods can be complements or substitutes and each retailer has a captive consumer base `a la Burdett and Judd (1983). We find that the symmetric Nash Equilibrium of this model features atomless pricing strategies for both goods. When the two goods are complements the prices charged by any retailer are, at least locally, negatively correlated so if one of the goods is priced high the other one is on a discount. This finding is supported by an empirical observation that simultaneous discounts of complements are infrequent. In contrast, if the goods are substitutes or independently valued the prices will be randomized independently unless the less valuable substitute is not sold at all. In the case of complements the retailers earn higher profit relative to the case of selling both goods only as a bundle. The ability to "discriminate" between the captives and the shoppers through keeping the sum of the two prices high while setting one of the prices low drives the result. Such discrimination is impossible when the goods are substitutes as consumers switch to buying the lower priced substitute. Additionally, we provide some insights on bundling in the price dispersion setting.

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File URL: http://www.iset.ge/files/014-08.pdf
File Function: First version, 2008
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Bibliographic Info

Paper provided by International School of Economics at TSU, Tbilisi, Republic of Georgia in its series Working Papers with number 014-08.

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Length: 31 pages
Date of creation: Oct 2008
Date of revision:
Handle: RePEc:tbs:wpaper:08-014

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  1. Chen, Yongmin, 1997. "Equilibrium Product Bundling," The Journal of Business, University of Chicago Press, vol. 70(1), pages 85-103, January.
  2. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September.
  3. Barry Nalebuff, 2004. "Bundling as an Entry Barrier," The Quarterly Journal of Economics, MIT Press, vol. 119(1), pages 159-187, February.
  4. Armstrong, Mark & Vickers, John, 2001. "Competitive Price Discrimination," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 579-605, Winter.
  5. Jennifer F. Reinganum, 1978. "A Simple Model of Equilibrium Price Dispersion," Discussion Papers 335, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. R. Venkatesh & Wagner Kamakura, 2003. "Optimal Bundling and Pricing under a Monopoly: Contrasting Complements and Substitutes from Independently Valued Products," The Journal of Business, University of Chicago Press, vol. 76(2), pages 211-232, April.
  7. D. VAN DEN POEL & Jan J. DE SCHAMPHELAERE & G. WETS, 2003. "Direct and Indirect Effects of Retail Promotions," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 03/202, Ghent University, Faculty of Economics and Business Administration.
  8. Choi, Jay Pil & Stefanadis, Christodoulos, 2001. "Tying, Investment, and the Dynamic Leverage Theory," RAND Journal of Economics, The RAND Corporation, vol. 32(1), pages 52-71, Spring.
  9. Rajiv Lal & Carmen Matutes, 1989. "Price Competition in Multimarket Duopolies," RAND Journal of Economics, The RAND Corporation, vol. 20(4), pages 516-537, Winter.
  10. Denicolo, Vincenzo, 2000. "Compatibility and Bundling with Generalist and Specialist Firms," Journal of Industrial Economics, Wiley Blackwell, vol. 48(2), pages 177-88, June.
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