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Bertrand Supertraps

Author

Listed:
  • Luís M. B. Cabral

    () (Stern School of Business, New York University, New York, New York 10012)

  • Miguel Villas-Boas

    () (Haas School of Business, University of California, Berkeley, California 94720)

Abstract

We study oligopoly price competition between multiproduct firms---firms whose products interact in the profit function. Specifically, we focus on the impact of intrafirm product interactions on the level of equilibrium profits. This impact may be decomposed in two different ways: (a) a direct effect (keeping the competitors' actions fixed) plus a strategic effect (i.e., through the competitors' actions); or, alternatively, (b) a competitive advantage effect (change in firm i only) plus an imitation effect (change in all other firms). We derive conditions such that (a) the strategic effect more than outweighs the direct effect, and conditions such that (b) the imitation effect more than outweighs the competitive advantage effect: Bertrand supertraps. For example, an increase in the degree of economies of scope would increase profits if prices were fixed or if the change were limited to firm i's cost function. However, if all firms increase the degree of economies of scope then all firms receive lower profits. A variety of other applications is considered, including learning curves, core competencies, demand synergies, systems competition, compatibility, bundling, network effects, switching costs, durable goods, long-term contracts.

Suggested Citation

  • Luís M. B. Cabral & Miguel Villas-Boas, 2005. "Bertrand Supertraps," Management Science, INFORMS, vol. 51(4), pages 599-613, April.
  • Handle: RePEc:inm:ormnsc:v:51:y:2005:i:4:p:599-613
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    File URL: http://dx.doi.org/10.1287/mnsc.1040.0313
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. repec:eee:ijrema:v:32:y:2015:i:2:p:219-222 is not listed on IDEAS
    2. Luís Cabral, 2002. "Comments on Clemons, Hitt, Gu, Thatcher, and Weber," Journal of Financial Services Research, Springer;Western Finance Association, vol. 22(1), pages 91-93, August.
    3. Karlsson, Martin, 2007. "Quality incentives for GPs in a regulated market," Journal of Health Economics, Elsevier, vol. 26(4), pages 699-720, July.
    4. Baojun Jiang & Kannan Srinivasan, 2016. "Pricing and persuasive advertising in a differentiated market," Marketing Letters, Springer, vol. 27(3), pages 579-588, September.
    5. Luís Cabral, 2011. "Dynamic Price Competition with Network Effects," Review of Economic Studies, Oxford University Press, vol. 78(1), pages 83-111.
    6. X. Wang & Jingang Zhao, 2010. "Why are firms sometimes unwilling to reduce costs?," Journal of Economics, Springer, vol. 101(2), pages 103-124, October.
    7. Vives, Xavier, 2005. "Games with strategic complementarities: New applications to industrial organization," International Journal of Industrial Organization, Elsevier, vol. 23(7-8), pages 625-637, September.
    8. repec:kap:qmktec:v:15:y:2017:i:3:d:10.1007_s11129-017-9185-x is not listed on IDEAS
    9. Zsolt Katona, 2015. "Democracy in product design: Consumer participation and differentiation strategies," Quantitative Marketing and Economics (QME), Springer, vol. 13(4), pages 359-394, December.
    10. repec:bla:ecnote:v:46:y:2017:i:3:p:555-586 is not listed on IDEAS

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