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Strategic Choice on Product Line in Vertically Differentiated Duopoly

Author

Listed:
  • Ryoma Kitamura

    () (Graduate School of Economics, Kwansei Gakuin University)

  • Tetsuya Shinkai

    () (School of Economics, Kwansei Gakuin University)

Abstract

In a real oligopoly, firms often supply multiple products differentiated by quality in the same market. To examine why they do so, we consider a duopoly model in which firms can choose between supplying two vertically differentiated products and selling a single product in the same market. By deriving equilibriums for possible games and comparing their outcomes with each other, we explored the conditions in which firms strategically determine their product lines, choosing to sell between a single product and two products. The first three are the cases in which both firms supply both products, or they supply either homogeneous product of the two in the same market. The last two are those in which one firm supplies both but another firm does either of the two. We find that a firm producing only one product has an incentive to launch another product as long as it can do so.

Suggested Citation

  • 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.
  • Handle: RePEc:kgu:wpaper:120
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    File URL: http://192.218.163.163/RePEc/pdf/kgdp120.pdf
    File Function: First version, 2014
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    References listed on IDEAS

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    1. Glenn Ellison, 2005. "A Model of Add-On Pricing," The Quarterly Journal of Economics, Oxford University Press, vol. 120(2), pages 585-637.
    2. 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.
    3. Motta, Massimo, 1993. "Endogenous Quality Choice: Price vs. Quantity Competition," Journal of Industrial Economics, Wiley Blackwell, vol. 41(2), pages 113-131, June.
    4. 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.
    5. Joan Calzada & Tommaso M. Valletti, 2012. "Intertemporal Movie Distribution: Versioning When Customers Can Buy Both Versions," Marketing Science, INFORMS, vol. 31(4), pages 649-667, July.
    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.
    7. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-440, June.
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    Cited by:

    1. 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.

    More about this item

    Keywords

    Multi-product firm; Duopoly; Strategic choice of product line; Vertical product differentiation; Cannibalization; Launch of product;

    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

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