IDEAS home Printed from https://ideas.repec.org/p/kgu/wpaper/113.html
   My bibliography  Save this paper

Cannibalization may Allow a Cost-inefficient Firm to Earn more than a Cost-effcient Firm in a Duopoly with Two Vertically Differentiated Goods

Author

Listed:
  • Ryoma Kitamura

    (Graduate School of Economics, Kwansei Gakuin University)

  • Tetsuya Shinkai

    (School of Economics, Kwansei Gakuin University)

Abstract

We consider cannibalization in a duopoly model in which firms with diffrent costs supply two vertically differentiated products in the same market. We find that an increase in the difference in quality between the two goods or a decrease in the marginal cost of the high-quality goods leads to cannibalization, such that the high-quality goods keep out the low-quality goods from the market. We show that, in equilibrium, cannibalization aspects the product line of firms. As a result, an inefficient firm may earn more than the efficient firm. If the difference in the quality of the two goods is small enough, an increase in the production costs of the inefficient firm improves social welfare.

Suggested Citation

  • Ryoma Kitamura & Tetsuya Shinkai, 2014. "Cannibalization may Allow a Cost-inefficient Firm to Earn more than a Cost-effcient Firm in a Duopoly with Two Vertically Differentiated Goods," Discussion Paper Series 113, School of Economics, Kwansei Gakuin University, revised Jan 2014.
    • Handle: RePEc:kgu:wpaper:113
    as

    Download full text from publisher

    File URL: http://192.218.163.163/RePEc/pdf/kgdp113.pdf
    File Function: First version, 2014
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Motta, Massimo, 1993. "Endogenous Quality Choice: Price vs. Quantity Competition," Journal of Industrial Economics, Wiley Blackwell, vol. 41(2), pages 113-131, June.
    2. Glenn Ellison, 2005. "A Model of Add-On Pricing," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(2), pages 585-637.
    3. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-440, June.
    4. Justin P. Johnson & David P. Myatt, 2003. "Multiproduct Quality Competition: Fighting Brands and Product Line Pruning," American Economic Review, American Economic Association, vol. 93(3), pages 748-774, June.
    5. Valletti, Tommaso M, 2000. "Minimum Quality Standards under Cournot Competition," Journal of Regulatory Economics, Springer, vol. 18(3), pages 235-245, November.
    6. Ryoma Kitamura & Tetsuya Shinkai, 2013. "The Economics of Cannibalization: A Duopoly in which Firms Supply Two Vertically Differentiated Products," Discussion Paper Series 100, School of Economics, Kwansei Gakuin University, revised Feb 2013.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ryoma Kitamura, 2014. "Network externalities between carriers or machines:How they work in the smartphone industry," Discussion Paper Series 117, School of Economics, Kwansei Gakuin University, revised Mar 2014.
    2. Ryoma Kitamura & Tetsuya Shinkai, 2014. "Strategic Choice on Product Line in Vertically Differentiated Duopoly," Discussion Paper Series 120, School of Economics, Kwansei Gakuin University, revised Aug 2014.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ryoma Kitamura & Tetsuya Shinkai, 2014. "Strategic Choice on Product Line in Vertically Differentiated Duopoly," Discussion Paper Series 120, School of Economics, Kwansei Gakuin University, revised Aug 2014.
    2. Ryoma Kitamura & Tetsuya Shinkai, 2014. "Cannibalization within the Single Vertically Di¤erentiated Duopoly," Discussion Paper Series 124, School of Economics, Kwansei Gakuin University, revised Dec 2014.
    3. Tetsuya Shinkai & Ryoma Kitamura, 2019. "Production Substitution of Goods Within and Between Firms in a Multiproduct Duopoly," Discussion Paper Series 197, School of Economics, Kwansei Gakuin University.
    4. Tetsuya Shinkai & Ryoma Kitamura, 2018. "Product Line Strategy within a Vertically Differentiated Duopoly under Non-negativity Outputs Constraints," Discussion Paper Series 179, School of Economics, Kwansei Gakuin University.
    5. Ryoma Kitamura & Tetsuya Shinkai, 2015. "Product Line Strategy in a Vertically Di¤erentiated Duopoly," Discussion Paper Series 134, School of Economics, Kwansei Gakuin University, revised Aug 2015.
    6. Rasha Ahmed & Kathleen Segerson, 2007. "Emissions Control and the Regulation of Product Markets: The Case of Automobiles," Working papers 2007-40, University of Connecticut, Department of Economics.
    7. Stefan Lutz & Mario Pezzino, 2012. "International Strategic Choice of Minimum Quality Standards and Welfare," Journal of Common Market Studies, Wiley Blackwell, vol. 50(4), pages 594-613, July.
    8. Ahmed, Rasha & Segerson, Kathleen, 2011. "Collective voluntary agreements to eliminate polluting products," Resource and Energy Economics, Elsevier, vol. 33(3), pages 572-588, September.
    9. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899, January.
    10. Garella, Paolo G. & Lambertini, Luca, 2014. "Bidimensional vertical differentiation," International Journal of Industrial Organization, Elsevier, vol. 32(C), pages 1-10.
    11. Tetsuya Shinkai & Ryoma Kitamura, 2021. "How Do the Relative Superiority of a High-quality Good and Cost Inefficiency between Firms Affect Product Lines in Multiproduct Firms?," Discussion Paper Series 230, School of Economics, Kwansei Gakuin University.
    12. Kitamura, Ryoma & Shinkai, Tetsuya, 2015. "Product line strategy within a vertically differentiated duopoly," Economics Letters, Elsevier, vol. 137(C), pages 114-117.
    13. Xingtang Wang & Leonard F. S. Wang, 2022. "Corporate cannibalism in an oligopolistic market," International Journal of Economic Theory, The International Society for Economic Theory, vol. 18(3), pages 402-417, September.
    14. Naixin Zhu, 2023. "Dissertation on Applied Microeconomics of Freemium Pricing Strategies in Mobile App Market," Papers 2305.09479, arXiv.org.
    15. L. Lambertini & A. Tampieri, 2012. "On the Emergence of Overcompliance with Endogenous Environmental Standards and Patronising Consumers," Working Papers wp847, Dipartimento Scienze Economiche, Universita' di Bologna.
    16. Tai‐Liang Chen & Zuyi Huang, 2020. "Technology licensing or cost‐reducing outsourcing? Game theoretical analysis on consumers' home bias effects and firms' optimal strategies," Bulletin of Economic Research, Wiley Blackwell, vol. 72(4), pages 417-433, October.
    17. Jonathan Levin, 2011. "The Economics of Internet Markets," Discussion Papers 10-018, Stanford Institute for Economic Policy Research.
    18. Olivier Bonroy, 2006. "Le standard de qualité minimale est-il un instrument socialement optimal ?. Une revue de littérature," Revue économique, Presses de Sciences-Po, vol. 57(1), pages 35-53.
    19. Mario Pezzino, 2010. "Hospital competition when patients have different willingness to pay for quality," Economics Discussion Paper Series 1014, Economics, The University of Manchester.
    20. Bourreau, Marc & Manenti, Fabio M., 2023. "Selling cross-border in online markets: The impact of the ban on geoblocking strategies," International Journal of Industrial Organization, Elsevier, vol. 86(C).

    More about this item

    Keywords

    Multi-product firm; Duopoly; Cannibalization; Vertical product differentiation;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • 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
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kgu:wpaper:113. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Toshihiro Okada (email available below). General contact details of provider: https://edirc.repec.org/data/dekgujp.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.