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On the Effects of Selective Below-Cost Pricing in a Vertical Differentiation Model

  • Colombo, Stefano

We analyse the effects of predation in a vertical differentiation model, where the highquality incumbent is able to price discriminate while the low-quality entrant sets a uniform price. The incumbent may act as a predator, that is, it may price below its marginal costs on a subset of consumers to induce the rival's exit. We show that the entrant may adopt an aggressive attitude to make predation unprofitable for the incumbent. In this case predation does not occur and the equilibrium prices are lower than the equilibrium prices which would emerge in a contest of explicitly forbidden predation. Moreover, we show that when the incumbent may choose whether to price discriminate or not before the game starts, if the quality cost function is sufficiently convex, there always exists a parameter space on which the incumbent prefers to commit not to price discriminate.

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Paper provided by Kiel Institute for the World Economy in its series Economics Discussion Papers with number 2009-25.

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Date of creation: 2009
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Handle: RePEc:zbw:ifwedp:7589
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  1. Qihong Liu & Konstantinos Serfes, 2002. "Quality of Information and Oligopolistic Price Discrimination," Industrial Organization 0203004, EconWPA, revised 06 Mar 2002.
  2. repec:cup:cbooks:9780521816632 is not listed on IDEAS
  3. Stole, Lars A., 2007. "Price Discrimination and Competition," Handbook of Industrial Organization, Elsevier.
  4. Crampes, C. & Hollander, A., 1991. "Duopoly and Quality Standards," Cahiers de recherche 9128, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  5. Luca Lambertini & Piero Tedeschi, 2006. "On the Social Desirability of Patents for Sequential Innovations in a Vertically Differentiated Market," Working Papers 20060502, Università degli Studi di Milano-Bicocca, Dipartimento di Statistica.
  6. Baumol, William J, 1996. "Predation and the Logic of the Average Variable Cost Test," Journal of Law and Economics, University of Chicago Press, vol. 39(1), pages 49-72, April.
  7. Pei-Cheng Liao, 2008. "A Note On Market Coverage In Vertical Differentiation Models With Fixed Costs," Bulletin of Economic Research, Wiley Blackwell, vol. 60(1), pages 27-44, 01.
  8. THISSE, Jacques-François & VIVES, Xavier, . "On the strategic choice of spatial price policy," CORE Discussion Papers RP -793, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  9. David Encaoua & Abraham Hollander, 2007. "First-Degree Discrimination by a Duopoly: Pricing and Quality Choice," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00177604, HAL.
  10. Tabuchi, Takatoshi, 1999. "Pricing policy in spatial competition," Regional Science and Urban Economics, Elsevier, vol. 29(5), pages 617-631, September.
  11. repec:cup:cbooks:9780521016919 is not listed on IDEAS
  12. Liliane Karlinger & Massimo Motta, 2007. "Exclusionary Pricing and Rebates When Scale Matters," Economics Working Papers ECO2007/30, European University Institute.
  13. Armstrong, Mark, 2006. "Price discrimination," MPRA Paper 4693, University Library of Munich, Germany.
  14. Liu, Qihong & Serfes, Konstantinos, 2005. "Imperfect price discrimination in a vertical differentiation model," International Journal of Industrial Organization, Elsevier, vol. 23(5-6), pages 341-354, June.
  15. Eber, Nicolas, 1997. "A note on the strategic choice of spatial price discrimination," Economics Letters, Elsevier, vol. 55(3), pages 419-423, September.
  16. Anindya Ghose & Vidyanand Choudhary & Tridas Mukhopadhyay & Uday Rajan, 2002. "Personalized Pricing and Quality Differentiation on the Internet," Review of Marketing Science Working Papers 2-1-1005, Berkeley Electronic Press.
  17. Lutz, Stefan & Lyon, Thomas P & Maxwell, John W, 2000. "Quality Leadership When Regulatory Standards Are Forthcoming," Journal of Industrial Economics, Wiley Blackwell, vol. 48(3), pages 331-48, September.
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