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Price Competition in a Vertizontally Differentiated Duopoly

Author

Listed:
  • Iwan Bos

    (Maastricht University)

  • Ronald Peeters

    (University of Otago)

Abstract

This paper develops a price competition duopoly model in which products are both horizontally and vertically differentiated. Firms each offer a standard and a premium product to buyers—some of whom are brand loyal. We establish the existence of a unique and symmetric competitive pricing equilibrium. Equilibrium prices are increasing in the degree of horizontal differentiation and the number of brand-loyal customers. The equilibrium price of the standard (premium) good is decreasing (increasing) in the quality difference and profits can increase in costs when this difference is large enough. If the pricing decision is taken at the product (division) level, then there is again a unique (and symmetric) competitive pricing equilibrium. Equilibrium prices and profits are lower than in the centralized case and demand for the standard product is higher when the quality difference is sufficiently large. Welfare is unambiguously lower with decentralized pricing.

Suggested Citation

  • Iwan Bos & Ronald Peeters, 2023. "Price Competition in a Vertizontally Differentiated Duopoly," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 62(3), pages 219-239, May.
    • Handle: RePEc:kap:revind:v:62:y:2023:i:3:d:10.1007_s11151-023-09895-0
    DOI: 10.1007/s11151-023-09895-0
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    More about this item

    Keywords

    Cannibalization; Multi-product oligopoly; Pricing; Vertizontal differentiation;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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