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Differentiated Duopoly with Asymmetric Costs

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  • Piercarlo Zanchettin

Abstract

In this paper, we compare Bertrand and Cournot equilibria in a differentiated duopoly with linear demand and cost functions. We extend the Singh and Vives (1984) model by allowing for a wider range of cost and demand (product quality) asymmetry between firms. Focusing on the case of substitute goods, we show that both the efficient firm's profits and industry profits are higher under Bertrand competition when asymmetry is strong and/or products are weakly differentiated. Therefore, Singh and Vives's ranking of profits between the two modes of competition is reversed in a sizeable portion of the relevant parameter space. Contrary to the standard result with symmetric firms, we also show that product differentiation can reduce both the efficient firm's and industry profits, implying that a local incentive towards less differentiation may arise.

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  • Piercarlo Zanchettin, 2006. "Differentiated Duopoly with Asymmetric Costs," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(4), pages 999-1015, December.
  • Handle: RePEc:bla:jemstr:v:15:y:2006:i:4:p:999-1015
    DOI: 10.1111/j.1530-9134.2006.00125.x
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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, vol. 2(1), pages 29-46, March.
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    3. Lambertini, Luca, 1997. "Prisoners' Dilemma in Duopoly (Super)Games," Journal of Economic Theory, Elsevier, vol. 77(1), pages 181-191, November.
    4. Nirvikar Singh & Xavier Vives, 1984. "Price and Quantity Competition in a Differentiated Duopoly," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 546-554, Winter.
    5. Amir, Rabah & Jin, Jim Y., 2001. "Cournot and Bertrand equilibria compared: substitutability, complementarity and concavity," International Journal of Industrial Organization, Elsevier, vol. 19(3-4), pages 303-317, March.
    6. Hackner, Jonas, 2000. "A Note on Price and Quantity Competition in Differentiated Oligopolies," Journal of Economic Theory, Elsevier, vol. 93(2), pages 233-239, August.
    7. Qiu, Larry D., 1997. "On the Dynamic Efficiency of Bertrand and Cournot Equilibria," Journal of Economic Theory, Elsevier, vol. 75(1), pages 213-229, July.
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