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Why Are Firms Sometimes Unwilling to Reduce Costs?

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Abstract

This paper establishes three new results for multiproduct oligopolies: 1) it presents the first explicit expression of Nash equilibria for asymmetric multiproduct oligopolies; 2) it shows that reducing a multiproduct firms cost in Bertrand oligopolies will reduce its profits if the cost-reducing unit is sufficiently small; and 3) it demonstrates that a multiproduct firm has no incentive to eliminate a product whose sales are zero. Because a single-product firm whose sales are zero is indifferent between exiting and staying, and its cost reductions always increase its profits, our results are unique to the multiproduct firm, and they suggest that extending oligopoly studies from a single product to multi-products could be as significant as the extension of calculus from a single variable to multi-variables.

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File URL: http://economics.missouri.edu/working-papers/2007/wp0703_wang.pdf
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Bibliographic Info

Paper provided by Department of Economics, University of Missouri in its series Working Papers with number 0703.

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Length: 37 pgs.
Date of creation: 15 Jan 2007
Date of revision:
Handle: RePEc:umc:wpaper:0703

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Keywords: Effect of cost reduction; multiproduct oligopoly; price competition; quantity competition;

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References

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  1. Justin P. Johnson & David P. Myatt, 2003. "Multiproduct Quality Competition: Fighting Brands and Product Line Pruning," American Economic Review, American Economic Association, vol. 93(3), pages 748-774, June.
  2. Shapiro, Carl, 1989. "Theories of oligopoly behavior," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 6, pages 329-414 Elsevier.
  3. Volker Grossmann, 2003. "Firm Size and Diversification: Asymmetric Multiproduct Firms under Cournot Competition," CESifo Working Paper Series 1047, CESifo Group Munich.
  4. Tina Kao & Flavio Menezes, 2009. "Endogenous Mergers Under Multi-Market Competition," ANU Working Papers in Economics and Econometrics 2009-507, Australian National University, College of Business and Economics, School of Economics.
  5. Luis M. B. Cabral, 2001. "Multiproduct Oligopoly and Bertrand Supertraps," Working Papers 01-04, New York University, Leonard N. Stern School of Business, Department of Economics.
  6. Lapan, Harvey E. & Hennessy, David A., 2006. "A note on cost arrangement and market performance in a multi-product Cournot oligopoly," International Journal of Industrial Organization, Elsevier, vol. 24(3), pages 583-591, May.
  7. Dixit, Avinash K, 1986. "Comparative Statics for Oligopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 107-22, February.
  8. Vives, Xavier, 2005. "Games with strategic complementarities: New applications to industrial organization," International Journal of Industrial Organization, Elsevier, vol. 23(7-8), pages 625-637, September.
  9. S. Baranzoni & P. Bianchi & L. Lambertini, 2000. "Market Structure," Working Papers 368, Dipartimento Scienze Economiche, Universita' di Bologna.
  10. Fevrier, Philippe & Linnemer, Laurent, 2004. "Idiosyncratic shocks in an asymmetric Cournot oligopoly," International Journal of Industrial Organization, Elsevier, vol. 22(6), pages 835-848, June.
  11. Pham Do, K.H. & Folmer, H., 2003. "International Fisheries Agreements: The Feasibility and Impacts of Partial Cooperation," Discussion Paper 2003-52, Tilburg University, Center for Economic Research.
  12. Novshek, William, 1985. "On the Existence of Cournot Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 52(1), pages 85-98, January.
  13. Luís M. B. Cabral & Miguel Villas-Boas, 2005. "Bertrand Supertraps," Management Science, INFORMS, vol. 51(4), pages 599-613, April.
  14. Goldberg, Pinelopi Koujianou, 1995. "Product Differentiation and Oligopoly in International Markets: The Case of the U.S. Automobile Industry," Econometrica, Econometric Society, vol. 63(4), pages 891-951, July.
  15. Wang, X. Henry & Zhao, Jingang, 2007. "Welfare reductions from small cost reductions in differentiated oligopoly," International Journal of Industrial Organization, Elsevier, vol. 25(1), pages 173-185, February.
  16. Lapan, Harvey E. & Hennessy, David A., 2006. "Note on Cost Arrangement and Market Performance in a Multi-Product Cournot Oligopoly, A," Staff General Research Papers 12720, Iowa State University, Department of Economics.
  17. Harrington, Joseph E, Jr, 1987. "Collusion in Multiproduct Oligopoly Games under a Finite Horizon," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(1), pages 1-14, February.
  18. Zhang, Anming & Zhang, Yimin, 1996. "Stability of a Cournot-Nash equilibrium: The multiproduct case," Journal of Mathematical Economics, Elsevier, vol. 26(4), pages 441-462.
  19. Donald Smythe & Jingang Zhao, 2006. "The Complete Welfare Effects of Cost Reductions in a Cournot Oligopoly," Journal of Economics, Springer, vol. 87(2), pages 181-193, 03.
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Cited by:
  1. Bolle, Friedel, 2008. "Over- and under-investment according to different benchmarks," Discussion Papers 265, European University Viadrina Frankfurt (Oder), Department of Business Administration and Economics.

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