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A Vertically Differentiated Duopoly With Marginal Cost Differentials

Author

Listed:
  • PAMELA M. SCHMITT

    (Department of Economics, United States Naval Academy, 589 McNair Road 10-D, Annapolis, Maryland 21402, USA)

Abstract

A vertically differentiated duopoly model analyzes the impact of marginal cost differentials on price and quality. Firms play a two-stage game, first simultaneously choosing quality and then simultaneously choosing price. When the firm producing the high quality good faces an increase in its marginal cost, both firms increase price and upgrade quality. When the firm producing the low quality good faces an increase in its marginal cost, both firms decrease price and downgrade quality. When a first firm enters the market, quality position decisions are examined under the assumption that both the firm-specific and the quality-specific marginal costs are higher when a firm produces a higher quality good. The results show that the first entrant produces the low quality good and earns higher profits.

Suggested Citation

  • Pamela M. Schmitt, 2003. "A Vertically Differentiated Duopoly With Marginal Cost Differentials," International Game Theory Review (IGTR), World Scientific Publishing Co. Pte. Ltd., vol. 5(01), pages 73-81.
    • Handle: RePEc:wsi:igtrxx:v:05:y:2003:i:01:n:s0219198903000908
    DOI: 10.1142/S0219198903000908
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    Cited by:

    1. Emanuele Bacchiega & Luca Lambertini & Andrea Mantovaini, 2011. "Process And Product Innovation In A Vertically Differentiated Industry," International Game Theory Review (IGTR), World Scientific Publishing Co. Pte. Ltd., vol. 13(02), pages 209-221.

    More about this item

    Keywords

    Vertical differentiation; firm strategy; product quality; JEL Classification L13; JEL Classification L11; JEL Classification L15;
    All these keywords.

    JEL classification:

    • B4 - Schools of Economic Thought and Methodology - - Economic Methodology
    • C0 - Mathematical and Quantitative Methods - - General
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • D7 - Microeconomics - - Analysis of Collective Decision-Making
    • M2 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics

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