Dynamic Retail Price and Investment Competition
We develop a model of retail competition in which retailers select prices and investments in cost reduction. An equilibrium is constructed in which several identical firms enter and then engage in a phase of vigorous price competition. This phase is concluded with a "shakeout," as a low-price, low-cost firm comes to dominate the market. A central feature of the equilibrium is that low prices are complementary with large investments in cost reduction. Even though the dominant firm's price rises through time, and initially may be below marginal cost, we argue that an interpretation of predatory pricing may be inappropriate.
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Volume (Year): 28 (1997)
Issue (Month): 2 (Summer)
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- Stone, Kenneth E., 1991. "Competing with the Mass Merchandisers," Staff General Research Papers Archive 11230, Iowa State University, Department of Economics.
- Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September.
- Kreps, David M & Wilson, Robert, 1982.
Econometric Society, vol. 50(4), pages 863-94, July.
- Kyle Bagwell, 1987.
"Introductory Price as a Signal of Cost in a Model of Repeat Business,"
Review of Economic Studies,
Oxford University Press, vol. 54(3), pages 365-384.
- Kyle Bagwell, 1987. "Introductory Price as a Signal of Cost in a Model of Repeat Business," Discussion Papers 722, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Kyle Bagwell & Garey Ramey, 1992. "The Diamond Paradox: A Dynamic Resolution," Discussion Papers 1013, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Bagwell, Kyle, 1992. "A Model of Competitive Limit Pricing," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(4), pages 585-606, Winter.
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