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