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Choice of new attributes in the 'Elimination by Aspects' duopoly

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  • Laurent Reynald-Alexandre

    (PJSE - Paris-Jourdan Sciences Economiques - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique)

Abstract

The "Elimination by aspects" (EBA) duopoly of product differentiation (Laurent, 2006a) was constructed from the discrete model of probabilistic choice worked out by Tversky (1972a,b). In this framework, an unique price equilibrium exists with a "differentiation by attributes", which embodies horizontal and vertical differentiations as possible special cases. This paper extends this analysis by studying a two-stage game in which firms choose the specific attributes of their product and then compete in prices. At the price equilibrium, the "competitive effect", present in pure vertical differentiation models, is replaced by a "differentiation effect" in this EBA duopoly. Subgame perfect Nash equilibria are shown to exist with exogenous costs but also with attributes-dependent unit and fixed costs. At the equilibrium, products are generally differentiated both horizontally and vertically. But a purely vertical outcome may also occur when costs of innovation are strongly convex or when consumers are very sensible to the price levels. When costs are endogenous, the social optimum is achieved for a pure horizontal differentiation. Thus, there is too much differentiation at the equilibrium: the vertical dimension induces a strong raise of prices, which also reduces the welfare.

Suggested Citation

  • Laurent Reynald-Alexandre, 2006. "Choice of new attributes in the 'Elimination by Aspects' duopoly," PSE Working Papers halshs-00590311, HAL.
  • Handle: RePEc:hal:psewpa:halshs-00590311
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00590311
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    References listed on IDEAS

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    1. Ulrich Lehmann-Grube, 1997. "Strategic Choice of Quality When Quality is Costly: The Persistence of the High-Quality Advantage," RAND Journal of Economics, The RAND Corporation, vol. 28(2), pages 372-384, Summer.
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