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Can more consumers lead to lower profits? A model of multi-product competition

  • Azar, Ofer H.

The article analyzes the optimal pricing strategy of duopoly retailers who sell two goods to three consumer segments: two segments that are interested in one good, and one that wants to buy both goods. The analysis suggests that the markup on one of the goods might be negative and that the existence of consumers who buy both goods can either increase or decrease markups. Surprisingly, the addition of the consumers who buy both goods (unchanging the number of the other consumers) might decrease profits, and increasing the number of consumers who buy one good might also reduce profits. This suggests that firms should consider carefully how additional customers might affect the competitive environment and the equilibrium before attempting to attract them to the market.

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File URL: http://www.sciencedirect.com/science/article/B6V8F-50J4M77-1/2/f42a9e0a2187c24ff4a922cf5fe15a2a
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Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 76 (2010)
Issue (Month): 2 (November)
Pages: 184-195

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Handle: RePEc:eee:jeborg:v:76:y:2010:i:2:p:184-195
Contact details of provider: Web page: http://www.elsevier.com/locate/jebo

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  1. Glenn Ellison, 2004. "A Model of Add-on Pricing," Economics Working Papers 0049, Institute for Advanced Study, School of Social Science.
  2. Laibson, David I. & Gabaix, Xavier, 2006. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," Scholarly Articles 4554333, Harvard University Department of Economics.
  3. Dana Jr. James D., 1993. "The Organization and Scope of Agents: Regulating Multiproduct Industries," Journal of Economic Theory, Elsevier, vol. 59(2), pages 288-310, April.
  4. Lal, Rajiv & Matutes, Carmen, 1994. "Retail Pricing and Advertising Strategies," The Journal of Business, University of Chicago Press, vol. 67(3), pages 345-70, July.
  5. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, June.
  6. Garcia-Gallego, Aurora & Georgantzis, Nikolaos, 2001. "Multiproduct activity in an experimental differentiated oligopoly," International Journal of Industrial Organization, Elsevier, vol. 19(3-4), pages 493-518, March.
  7. DeGraba, Patrick, 2006. "The loss leader is a turkey: Targeted discounts from multi-product competitors," International Journal of Industrial Organization, Elsevier, vol. 24(3), pages 613-628, May.
  8. James D. Hess & Eitan Gerstner, 1987. "Loss Leader Pricing and Rain Check Policy," Marketing Science, INFORMS, vol. 6(4), pages 358-374.
  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. Doraszelski, Ulrich & Draganska, Michaela, 2003. "Market Segmentation Strategies of Multiproduct Firms," Research Papers 1827, Stanford University, Graduate School of Business.
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