Dynamic Retail Price and Investment Competition
We develop a simple model of retail competition in which retailers select prices and investments in cost reduction. Unable to observe firms' current prices prior to costly search, consumers monitor firms' historic pricing behavior. An equilibrium is constructed in which several identical firms enter and then engage in a phase of vigorous price competition, corresponding to a battle for low-price reputations. This phase is concluded with a "shakeout," as a low-price, low-cost firm comes to dominate the market while other firms lose market share. A central feature of the equilibrium is that low prices are complementary to large investments in cost reduction. Even though the dominant firm's price rises through time, and initially may be below marginal cost, we argue that an interpretation of predatory pricing may be appropriate, since the dominant firm is also the most-efficient (lowest-cost) firm in the market.
|Date of creation:||Oct 1993|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.kellogg.northwestern.edu/research/math/
More information through EDIRC
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bagwell, Kyle, 1992. "A Model of Competitive Limit Pricing," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(4), pages 585-606, Winter.
- Bagwell, Kyle, 1987.
"Introductory Price as a Signal of Cost in a Model of Repeat Business,"
Review of Economic Studies,
Wiley Blackwell, vol. 54(3), pages 365-84, July.
- Kyle Bagwell, 1987. "Introductory Price as a Signal of Cost in a Model of Repeat Business," Discussion Papers 722, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- David Kreps & Robert Wilson, 1998.
Levine's Working Paper Archive
237, David K. Levine.
- Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September.
- Stone, Kenneth E., 1991. "Competing with the Mass Merchandisers," Staff General Research Papers 11230, Iowa State University, Department of Economics.
- Kyle Bagwell & Garey Ramey, 1992. "The Diamond Paradox: A Dynamic Resolution," Discussion Papers 1013, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
When requesting a correction, please mention this item's handle: RePEc:nwu:cmsems:1115. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Fran Walker)
If references are entirely missing, you can add them using this form.