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Price competition and quality differentiation with multiproduct firms

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  • Yi-Ling Cheng
  • Shin-Kun Peng

Abstract

This paper examines a two-stage competition where firms simultaneously choose the number of products and qualities in the first stage, and then compete in prices. It is shown that a monopolist must sell a single product. In addition, in any equilibrium of multiproduct duopoly, there are segmented patterns of quality differentiation. Entangled configurations never emerge because each firm has an incentive to reduce the number of products facing direct competition with its rival. This result contrasts sharply with the equilibrium of non-segmented quality differentiation when firms compete in quantities. Furthermore, we find that the high-quality firm never offers more products than the low-quality firm, and quality differentiation between firms is greater than that within a firm. Copyright Springer-Verlag Wien 2014

Suggested Citation

  • Yi-Ling Cheng & Shin-Kun Peng, 2014. "Price competition and quality differentiation with multiproduct firms," Journal of Economics, Springer, vol. 112(3), pages 207-223, July.
    • Handle: RePEc:kap:jeczfn:v:112:y:2014:i:3:p:207-223
    DOI: 10.1007/s00712-013-0367-z
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    References listed on IDEAS

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    More about this item

    Keywords

    Multiproduct firms; Vertical product differentiation ; Quality differentiation; Quality competition; Bertrand competition; D43; L11; L13;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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