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On the effects of selective below-cost pricing in a vertical differentiation model

  • Colombo, Stefano

We analyse the effects of predation in a vertical differentiation model, where the high-quality incumbent is able to price discriminate while the low-quality entrant sets a uniform price. The incumbent may act as a predator, that is, it may price below its marginal costs on a subset of consumers to induce the rival's exit. We show that the entrant may adopt an aggressive attitude to make predation unprofitable for the incumbent. In this case predation does not occur and the equilibrium prices are lower than the equilibrium prices which would emerge in a contest of explicitly forbidden predation. Moreover, we show that when the incumbent may choose whether to price discriminate or not before the game starts, if the quality cost function is sufficiently convex, there always exists a parameter space on which the incumbent prefers to commit not to price discriminate.

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File URL: http://dx.doi.org/10.5018/economics-ejournal.ja.2009-33
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Article provided by Kiel Institute for the World Economy (IfW) in its journal Economics: The Open-Access, Open-Assessment E-Journal.

Volume (Year): 3 (2009)
Issue (Month): ()
Pages: 1-13

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Handle: RePEc:zbw:ifweej:200933
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  1. Qihong Liu & Konstantinos Serfes, 2002. "Quality of Information and Oligopolistic Price Discrimination," Industrial Organization 0207007, EconWPA.
  2. Crampes, Claude & Hollander, Abraham, 1995. "Duopoly and quality standards," European Economic Review, Elsevier, vol. 39(1), pages 71-82, January.
  3. Anindya Ghose & Vidyanand Choudhary & Tridas Mukhopadhyay & Uday Rajan, 2002. "Personalized Pricing and Quality Differentiation on the Internet," Review of Marketing Science Working Papers 2-1-1005, Berkeley Electronic Press.
  4. Liliane Karlinger & Massimo Motta, 2007. "Exclusionary Pricing and Rebates When Scale Matters," Economics Working Papers ECO2007/30, European University Institute.
  5. Lutz, Stefan & Lyon, Thomas P & Maxwell, John W, 2000. "Quality Leadership When Regulatory Standards Are Forthcoming," Journal of Industrial Economics, Wiley Blackwell, vol. 48(3), pages 331-48, September.
  6. L. Lambertini & P. Tedeschi, 2000. "On the Social Desirability of Patents for Sequential Innovations in a Vertically Differentiated Market," Working Papers 376, Dipartimento Scienze Economiche, Universita' di Bologna.
  7. Motta,Massimo, 2004. "Competition Policy," Cambridge Books, Cambridge University Press, number 9780521816632, Junio.
  8. Thisse, J.-F. & Vives, X., 1987. "On the strategic choice of spatial price policy," CORE Discussion Papers 1987008, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  9. David Encaoua & Abraham Hollander, 2007. "First-Degree Discrimination by a Duopoly: Pricing and Quality Choice," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00177604, HAL.
  10. Baumol, William J, 1996. "Predation and the Logic of the Average Variable Cost Test," Journal of Law and Economics, University of Chicago Press, vol. 39(1), pages 49-72, April.
  11. Eber, Nicolas, 1997. "A note on the strategic choice of spatial price discrimination," Economics Letters, Elsevier, vol. 55(3), pages 419-423, September.
  12. Tabuchi, Takatoshi, 1999. "Pricing policy in spatial competition," Regional Science and Urban Economics, Elsevier, vol. 29(5), pages 617-631, September.
  13. Stole, Lars A., 2007. "Price Discrimination and Competition," Handbook of Industrial Organization, Elsevier.
  14. Armstrong, Mark, 2006. "Price discrimination," MPRA Paper 4693, University Library of Munich, Germany.
  15. Motta,Massimo, 2004. "Competition Policy," Cambridge Books, Cambridge University Press, number 9780521016919, Junio.
  16. Liu, Qihong & Serfes, Konstantinos, 2005. "Imperfect price discrimination in a vertical differentiation model," International Journal of Industrial Organization, Elsevier, vol. 23(5-6), pages 341-354, June.
  17. Pei-Cheng Liao, 2008. "A Note On Market Coverage In Vertical Differentiation Models With Fixed Costs," Bulletin of Economic Research, Wiley Blackwell, vol. 60(1), pages 27-44, 01.
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