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Price‐increasing competition

Author

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  • Yongmin Chen
  • Michael H. Riordan

Abstract

In a discrete choice model of product differentiation, the symmetric duopoly price may be lower than, equal to, or higher than the single‐product monopoly price. Whereas the market share effect encourages a duopolist to charge less than the monopoly price because a duopolist serves fewer consumers, the price sensitivity effect motivates a higher price when more consumer choice steepens the firm's demand curve. The joint distribution of consumer values for the two conceivable products determines the relative strength of these effects. The analysis provides precise conditions for price‐increasing competition and reveals that it is unexceptional from a theoretical perspective.

Suggested Citation

  • Yongmin Chen & Michael H. Riordan, 2008. "Price‐increasing competition," RAND Journal of Economics, RAND Corporation, vol. 39(4), pages 1042-1058, December.
    • Handle: RePEc:bla:randje:v:39:y:2008:i:4:p:1042-1058
    DOI: 10.1111/j.1756-2171.2008.00049.x
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    References listed on IDEAS

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