The Existence of Low-End Firms May Help High-End Firms
Two models of competition between high-end and low-end products benefiting the high-end firms are presented. One is a quantity competition model, and the other is a price competition model with product differentiation. The key factor is the existence of two heterogeneous consumer groups: those who demand only high-end (name-brand) products and those who care little whether products are high or low end. We show that, under certain conditions, the profits of firms in the high-end market are larger when there are firms producing low-end products than when there are not. The existence of price-sensitive consumers who care little about product quality intensifies competition among the high-end firms. The existence of low-end firms functions as a credible threat, which induces the high-end firms not to overproduce because price-sensitive consumers buy products from the low-end firms. The result provides a new theoretical mechanism concerning the profitability and pricing of national brand firms after the entry of private labels. It has an implication for pricing and marketing strategies: Established firms should not decrease their prices after the entry of nonestablished firms.
Volume (Year): 28 (2009)
Issue (Month): 1 (01-02)
|Contact details of provider:|| Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA|
Web page: http://www.informs.org/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Michael R. Baye & John Morgan & Patrick Scholten, 2004.
"Price Dispersion In The Small And In The Large: Evidence From An Internet Price Comparison Site,"
Journal of Industrial Economics,
Wiley Blackwell, vol. 52(4), pages 463-496, December.
- Michael R. Baye & John Morgan & Patrick Scholten, 2004. "Price Dispersion in the Small and in the Large: Evidence from an Internet Price Comparison Site," Working Papers 2004-03, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
- John R. Hauser & Steven M. Shugan, 2008.
"Defensive Marketing Strategies,"
INFORMS, vol. 27(1), pages 88-110, 01-02.
- Cabral, Luis M. B., 2000. "Introduction to Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262032864.
- Soberman, David A. & Parker, Philip M., 2004. "Private labels: psychological versioning of typical consumer products," International Journal of Industrial Organization, Elsevier, vol. 22(6), pages 849-861, June.
- Richard G. Frank & David S. Salkever, 1995.
"Generic Entry and the Pricing of Pharmaceuticals,"
NBER Working Papers
5306, National Bureau of Economic Research, Inc.
- Jan-Benedict E. M. Steenkamp & Vincent R. Nijs & Dominique M. Hanssens & Marnik G. Dekimpe, 2005. "Competitive Reactions to Advertising and Promotion Attacks," Marketing Science, INFORMS, vol. 24(1), pages 35-54, September.
- Ward, Michael B. & Shimshack, Jay P. & Perloff, Jeffrey M. & Harris, J. Michael, 2002.
"Effects of the private-label invasion in food industries,"
22186, University Library of Munich, Germany.
- Michael B. Ward & Jay P. Shimshack & Jeffrey M. Perloff & J. Michael Harris, 2002. "Effects of the Private-Label Invasion in Food Industries," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 84(4), pages 961-973.
- Steven J. Davis & Kevin M. Murphy & Robert H. Topel, 2001.
"Entry, Pricing and Product Design in an Initially Monopolized Market,"
NBER Working Papers
8547, National Bureau of Economic Research, Inc.
- Steven J. Davis & Kevin M. Murphy & Robert H. Topel, 2004. "Entry, Pricing, and Product Design in an Initially Monopolized Market," Journal of Political Economy, University of Chicago Press, vol. 112(S1), pages 188-225, February.
- Rosenthal, Robert W, 1980. "A Model in Which an Increase in the Number of Sellers Leads to a Higher Price," Econometrica, Econometric Society, vol. 48(6), pages 1575-1579, September.
- 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.
- Serdar Sayman & Stephen J. Hoch & Jagmohan S. Raju, 2002. "Positioning of Store Brands," Marketing Science, INFORMS, vol. 21(4), pages 378-397, June.
- Taylor Randall & Karl Ulrich & David Reibstein, 1998. "Brand Equity and Vertical Product Line Extent," Marketing Science, INFORMS, vol. 17(4), pages 356-379.
- Narasimhan, Chakravarthi, 1988. "Competitive Promotional Strategies," The Journal of Business, University of Chicago Press, vol. 61(4), pages 427-449, October.
- France Leclerc & Christopher K. Hsee & Joseph C. Nunes, 2005. "Narrow Focusing: Why the Relative Position of a Good in Its Category Matters More Than It Should," Marketing Science, INFORMS, vol. 24(2), pages 194-205, August.
- Inderst, Roman, 2002. "Why competition may drive up prices," Journal of Economic Behavior & Organization, Elsevier, vol. 47(4), pages 451-462, April.
- Ikuo Ishibashi & Noriaki Matsushima, 2006. "Inviting entrants may help incumbent firms," Discussion Papers 2006-46, Kobe University, Graduate School of Business Administration.
- Stiglitz, Joseph E, 1987. "Competition and the Number of Firms in a Market: Are Duopolies More Competitive than Atomistic Markets?," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1041-1061, October.
- Kevin Lane Keller & Donald R. Lehmann, 2006. "Brands and Branding: Research Findings and Future Priorities," Marketing Science, INFORMS, vol. 25(6), pages 740-759, 11-12.
When requesting a correction, please mention this item's handle: RePEc:inm:ormksc:v:28:y:2009:i:1:p:136-147. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.