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The Introduction of New Product Qualities by Incumbent Firms: Market Proliferation versus Cannibalization

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  • Ralph Siebert

Abstract

This study analyzes the optimal provision of goods in a market characterized by vertical product differentiation. We consider a duopoly model in which incumbents may introduce a new product with certain quality, and decide whether to keep or to withdraw the existing product from the market. We find that the strategic and cannibalization effects dominate, such that no room is left for discrimination among consumers. The innovator always withdraws the existing product from the market, in order to reduce price competition and to avoid cannibalizing its new product demand. In contrast to horizontally differentiated markets, firms are better off not to offer a range or interval of product qualities in vertically differentiated markets. Hence, firms fare better, despite offering a smaller variety of goods. ZUSAMMENFASSUNG - (Die Einfuehrung neuer Qualitaetsprodukte von Unternehmen: Marktnischenbesetzung versus Kannibalisierung der Nachfrage) Diese Studie analysiert das optimale Angebot von Guetern, die sich in der Qualitaet untescheiden. Wir betrachten ein Modell, in dem zwei insaessige Unternehmen neue Produkte mit unterschiedlicher Qualitaet in den Markt einfuehren koennen. Zudem koennen die Innovatoren entscheiden, ob ihre existierenden Produkte weiterhin im Markt angeboten oder abgezogen werden sollen. Wir zeigen, dass strategische Effekte und Kannibalisierungseffekte keine Diskriminierung zwischen den Konsumenten zulassen. Der Innovator zieht das existierende Produkt immer aus dem Markt, um einen erhoehten Preiswettbewerb und eine Kannibilisierung der eigenen Nachfrage zu vermeiden. Im Gegensatz zu horizontal differenzierten Maerkten, stellen sich Unternehmen in vertikal differenzierten Maerkten besser, eine geringere Produktvielfalt anzubieten.

Suggested Citation

  • Ralph Siebert, 2003. "The Introduction of New Product Qualities by Incumbent Firms: Market Proliferation versus Cannibalization," CIG Working Papers SP II 2003-11, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
  • Handle: RePEc:wzb:wzebiv:spii2003-11
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    References listed on IDEAS

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    Cited by:

    1. Gabszewicz, Jean J. & Marini, Marco A. & Tarola, Ornella, 2017. "Vertical differentiation and collusion: Pruning or proliferation?," Research in Economics, Elsevier, vol. 71(1), pages 129-139.
    2. Tarola, Ornella, 2013. "Acquisition vsus de novo entry: A theoretical appraisal," Research in Economics, Elsevier, vol. 67(2), pages 179-188.
    3. Jean Gabszewicz & Ornella Tarola, 2012. "Product innovation and firms’ ownership," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 21(4), pages 323-343, April.
    4. Yuanzhu Lu & Xiaolin Xing & Fang-Fang Tang, 2008. "Retailers' Incentive to Sell through a New Selling Channel and Pricing Behavior in a Multi-channel Environment," Annals of Economics and Finance, Society for AEF, vol. 9(2), pages 315-343, November.
    5. Jean J. Gabszewicz & Marco A. Marini & Ornella Tarola, 2016. "Vertical Differentiation and Collusion: Cannibalization or Proliferation?," Working Papers 2016.15, Fondazione Eni Enrico Mattei.

    More about this item

    Keywords

    Asymmetric Firms; Cannibalization; Market Proliferation; New Product Introduction; Product Innovation; Vertical Product Differentiation.;

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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