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Cocktails done right: price competition and welfare when substitutes become complements

Author

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  • Matteo Alvisi

    (University of Bologna
    Johns Hopkins University - SAIS Europe)

  • Emanuela Carbonara

    (University of Bologna
    Johns Hopkins University - SAIS Europe)

Abstract

In this paper we analyze the effects of the introduction (by either firms or authorities) of a composite good consisting of a fixed proportion of two imperfectly substitutable stand-alone products. First, we find that such a “cocktail” rises the Bertrand equilibrium prices as it introduces a certain degree of complementarity. It also creates incentives to price discriminate and products can be sold at a discount or at a premium (depending on their degree of substitutability) when they are used as part of the composite good. We consider two distinct forms of price discrimination: a traditional one, in which producers set their prices independently of each other and a coordinated one, in which producers cooperate (collude) when setting the price of the composite good. Composite goods might have either a positive or a negative impact on consumer surplus. The sign of the impact depends on the form of price discrimination and consumers tend to be better off if producers coordinate. The impact is also more likely to be positive if “cocktails are done right”, i.e., if their quality is high compared to the quality of the stand-alone products.

Suggested Citation

  • Matteo Alvisi & Emanuela Carbonara, 2020. "Cocktails done right: price competition and welfare when substitutes become complements," Journal of Economics, Springer, vol. 131(1), pages 1-38, September.
  • Handle: RePEc:kap:jeczfn:v:131:y:2020:i:1:d:10.1007_s00712-020-00690-z
    DOI: 10.1007/s00712-020-00690-z
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    References listed on IDEAS

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    More about this item

    Keywords

    Complements; Vertical differentiation; Price discounts and premia; Price discrimination; Excessive pricing; Pharmaceutical markets;
    All these keywords.

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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