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A limit to price-increasing competition

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  • Roessler, Christian

Abstract

Differentiated entry may cause an incumbent firm to increase its price if the entering brand attracts price-sensitive consumers. This paper generalizes from the known cases with one-dimensional and two-dimensional products, showing for a finite number of attributes that there is scope for price-increasing competition, depending on the entrant’s product positioning. The extension is critical because it leads to a reversal that has not been considered. The highest possible duopoly price converges to the monopoly price as the dimensionality increases. Intuitively, when the product is more complex, tastes in the intersection of two brand markets (at any prices) are more specific and less frequent. This thinning of the fringe diminishes the effect of competitive entry.

Suggested Citation

  • Roessler, Christian, 2012. "A limit to price-increasing competition," Journal of Mathematical Economics, Elsevier, vol. 48(2), pages 65-76.
  • Handle: RePEc:eee:mateco:v:48:y:2012:i:2:p:65-76
    DOI: 10.1016/j.jmateco.2011.12.001
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    References listed on IDEAS

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    1. Robert C. Feenstra & James A. Levinsohn, 1995. "Estimating Markups and Market Conduct with Multidimensional Product Attributes," Review of Economic Studies, Oxford University Press, vol. 62(1), pages 19-52.
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    3. Greenhut, M L & Hwang, M & Ohta, H, 1975. "Observations on the Shape and Relevance of the Spatial Demand Function," Econometrica, Econometric Society, vol. 43(4), pages 669-682, July.
    4. Irmen, Andreas & Thisse, Jacques-Francois, 1998. "Competition in Multi-characteristics Spaces: Hotelling Was Almost Right," Journal of Economic Theory, Elsevier, vol. 78(1), pages 76-102, January.
    5. Greenhut,Melvin L. & Norman,George & Hung,Chao-Shun, 1987. "The Economics of Imperfect Competition," Cambridge Books, Cambridge University Press, number 9780521315647, April.
    6. Yongmin Chen & Michael H. Riordan, 2007. "Price and Variety in the Spokes Model," Economic Journal, Royal Economic Society, vol. 117(522), pages 897-921, July.
    7. Yongmin Chen & Michael H. Riordan, 2008. "Price-increasing competition," RAND Journal of Economics, RAND Corporation, vol. 39(4), pages 1042-1058.
    8. H. Ohta, 1981. "The Price Effects of Spatial Competition," Review of Economic Studies, Oxford University Press, vol. 48(2), pages 317-325.
    9. Greenhut,Melvin L. & Norman,George & Hung,Chao-Shun, 1987. "The Economics of Imperfect Competition," Cambridge Books, Cambridge University Press, number 9780521305525, April.
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    Cited by:

    1. Liu, Qihong & Shuai, Jie, 2013. "Multi-dimensional price discrimination," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 417-428.

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