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A limit to price-increasing competition

  • Roessler, Christian

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.

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File URL: http://www.sciencedirect.com/science/article/pii/S0304406811001431
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Article provided by Elsevier in its journal Journal of Mathematical Economics.

Volume (Year): 48 (2012)
Issue (Month): 2 ()
Pages: 65-76

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Handle: RePEc:eee:mateco:v:48:y:2012:i:2:p:65-76
Contact details of provider: Web page: http://www.elsevier.com/locate/jmateco

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  1. Irmen, Andreas & Thisse, Jacques-François, 1996. "Competition in Multi-characteristics Spaces: Hotelling was Almost Right," CEPR Discussion Papers 1446, C.E.P.R. Discussion Papers.
  2. Ohta, Hiroshi, 1981. "The Price Effects of Spatial Competition," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 317-25, April.
  3. Yongmin Chen & Michael H. Riordan, 2008. "Price-increasing competition," RAND Journal of Economics, RAND Corporation, vol. 39(4), pages 1042-1058.
  4. repec:cup:cbooks:9780521315647 is not listed on IDEAS
  5. 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 669-82, July.
  6. Feenstra, Robert C & Levinsohn, James A, 1995. "Estimating Markups and Market Conduct with Multidimensional Product Attributes," Review of Economic Studies, Wiley Blackwell, vol. 62(1), pages 19-52, January.
  7. repec:cup:cbooks:9780521305525 is not listed on IDEAS
  8. Yongmin Chen & Michael H. Riordan, 2007. "Price and Variety in the Spokes Model," Economic Journal, Royal Economic Society, vol. 117(522), pages 897-921, 07.
  9. Helge Sanner, 2005. "Price Responses to Market Entry With and Without Endogenous Product Choice," Volkswirtschaftliche Diskussionsbeiträge 81, Universität Potsdam, Wirtschafts- und Sozialwissenschaftliche Fakultät.
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