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Price Competition in a Duopoly Characterized by Positional Effects

Author

Listed:
  • Evdokia Dritsa

    () (Department of Economics, Athens University of Economics and Business)

  • Eleftherios Zacharias

    () (Department of Economics, Athens University of Economics and Business)

Abstract

We examine the price decisions in a vertically differentiated duopoly where the decision to buy a good depends not only upon the intrinsic utility from consuming it but also upon the social attributes (prestige, uniqueness etc.) associated with its consumption. These social attributes are especially important in vertically differentiated markets. We show that when these attributes are not very strong, if their intensity increases, the profits of both firms increase. However, when these attributes are very important, if their intensity increases, the profits of the firm that offers a lower quality variant increase whereas the profits of the firm that offers the higher quality variant decrease. Our results have implications on the amount of persuasive advertising firms should conduct in such markets.

Suggested Citation

  • Evdokia Dritsa & Eleftherios Zacharias, 2012. "Price Competition in a Duopoly Characterized by Positional Effects," Working Papers 12-21, NET Institute.
  • Handle: RePEc:net:wpaper:1221
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    File URL: http://www.NETinst.org/Zacharias_12-21.pdf
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    References listed on IDEAS

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    1. Gilles Le Garrec, 2005. "Retraites, soutenabilité et garantie du gouvernement," Recherches économiques de Louvain, De Boeck Université, pages 345-358.
    2. Basu, Kaushik, 1987. "Monopoly, quality uncertainty and 'status' goods," International Journal of Industrial Organization, Elsevier, pages 435-446.
    3. Grilo, Isabel & Shy, Oz & Thisse, Jacques-Francois, 2001. "Price competition when consumer behavior is characterized by conformity or vanity," Journal of Public Economics, Elsevier, pages 385-408.
    4. repec:ebl:ecbull:v:4:y:2008:i:34:p:1-10 is not listed on IDEAS
    5. George Deltas & Thanasis Stengos & Eleftherios Zacharias, 2011. "Product line pricing in a vertically differentiated oligopoly," Canadian Journal of Economics, Canadian Economics Association, pages 907-929.
    6. Luca Lambertini & Raimondello Orsini, 2005. "Positional effects, product quality and regulation in duopoly," Recherches économiques de Louvain, De Boeck Université, pages 367-381.
    7. Jing, Bing, 2007. "Network externalities and market segmentation in a monopoly," Economics Letters, Elsevier, pages 7-13.
    8. Lambertini, Luca & Orsini, Raimondello, 2002. "Vertically Differentiated Monopoly with a Positional Good," Australian Economic Papers, Wiley Blackwell, pages 151-163.
    9. Jaskold Gabszewicz, J. & Thisse, J. -F., 1979. "Price competition, quality and income disparities," Journal of Economic Theory, Elsevier, pages 340-359.
    10. Yi-Ling Cheng & Shin-Kun Peng & Takatoshi Tabuchi, 2010. "Multiproduct Duopoly with Vertical Di¤erentiation," IEAS Working Paper : academic research 10-A004, Institute of Economics, Academia Sinica, Taipei, Taiwan.
    11. Daniel Krähmer, 2006. "Advertising and Conspicuous Consumption," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, pages 661-682.
    12. H. Leibenstein, 1950. "Bandwagon, Snob, and Veblen Effects in the Theory of Consumers' Demand," The Quarterly Journal of Economics, Oxford University Press, pages 183-207.
    13. Yi-Ling Cheng & Shin-Kun Peng & Takatoshi Tabuchi, 2010. "Multiproduct Duopoly with Vertical Differentiation," CIRJE F-Series CIRJE-F-739, CIRJE, Faculty of Economics, University of Tokyo.
    14. Jaskold Gabszewicz, J. & Thisse, J. -F., 1979. "Price competition, quality and income disparities," Journal of Economic Theory, Elsevier, pages 340-359.
    15. Cheng Yi-Ling & Peng Shin-Kun & Tabuchi Takatoshi, 2011. "Multiproduct Duopoly with Vertical Differentiation," The B.E. Journal of Theoretical Economics, De Gruyter, pages 1-29.
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    Cited by:

    1. Laussel, Didier & Van Long, Ngo & Resende, Joana, 2015. "Network effects, aftermarkets and the Coase conjecture: A dynamic Markovian approach," International Journal of Industrial Organization, Elsevier, pages 84-96.

    More about this item

    Keywords

    Vertical differentiation; positional externalities; snob effect; bandwagon effect.;

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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