Price and quality competition

This study considers an oligopoly model with simultaneous price and quality choice. Ex-ante homogeneous sellers compete by offering products at one of two quality levels. The consumers have heterogeneous tastes for quality: for some consumers it is efficient to buy a high quality product, while for others it is efficient to buy a low quality product. In the symmetric equilibrium firms use mixed strategies that randomize both price and quality, and obtain strictly positive profits. This framework highlights trade-offs which determine the impact of consumer protection policy in the form of quality standards.     

Tax competition with heterogeneous firms

A model of tax competition in which firms earn rents is described. The size of these rents, coupled with the degree to which the firms are foreign-owned, determine the equilibrium tax rates. The existence of rents significantly alters some generally accepted results involving the possibility of a Pareto-improving common tax rate and the underprovision of publicly provided goods.     

Cartel sustainability with vertical product differentiation: Price versus quantity competition

In the context of a vertically differentiated duopoly, we analyse the influence of the degree of differentiation on cartel sustainability, under both price and quantity competition. We find that, under both Bertrand and Cournot competition, the effect of vertical product differentiation on sustainability of the collusive equilibrium is unclear. It is shown that, given a degree of differentiation, price collusion is more sustainable than quantity collusion.     

Strategic commitment and Cournot competition with labor-managed and profit-maximizing firms

This paper examines the behavior of a labor-managed income-per-member-maximizing firm and a profit-maximizing firm in a quantity-setting model with a strategic commitment. First, each firm independently decides whether or not to make a commitment to capacity. This capacity may subsequently be increased, but cannot be decreased. Hence, each firm’s investment choice changes its capital cost from a variable one into a fixed one. Second, each firm independently chooses its actual output. The paper examines the equilibrium of the quantity-setting mixed model and shows whether or not capacity investment is effective for the labor-managed firm and the profit-maximizing firm.     

Licensing under vertical product differentiation: Price vs. quantity competition

This paper develops a duopoly model of vertical product differentiation where two domestic firms incur variable costs of quality development. These domestic firms can purchase a superior foreign technology through licensing. Outcomes between Bertrand and Cournot competition are compared. We find that licensing raises domestic welfare, and domestic welfare is higher in Bertrand than in Cournot competition regardless of whether or not domestic firms engage in licensing. Non-exclusive licensing is also found to benefit the domestic country more than exclusive licensing.     

Price distributions and competition

This paper utilizes an equilibrium search model to investigate market structure and price dispersion. In a market with one large firm and a competitive fringe, the large firm offers the highest price. Fringe firms offer a distribution of lower prices.     

Price floors and competition

A potential source of instability of many economic models is that agents have little incentive to stick with the equilibrium. We show experimentally that this can matter with price competition. The control variable is a price floor, which increases the cost of deviating from equilibrium. According to traditional theory, a higher floor allows competitors to obtain higher profits. Behaviorally, the opposite result obtains with two (but not with four) competitors. An error model, which builds on Luce (Individual Choice Behavior, 1959), can adequately describe supra-Nash pricing with a low-floor, but then fails to capture the overall pro-competitive effect of a high-floor seen for duopolies.     

Two-sided competition with vertical differentiation

This paper studies duopoly in which two-sided platforms compete in differentiated products in a two-sided market. Direct competition on both sides leads to results that depart from much of the current literature. Under some conditions the unique equilibrium in pure strategies can be computed. It features discounts on one side and muted differentiation as the cross-market externality intensifies competition. Less standard, that equilibrium fails to exist when the externality is too powerful (that side becomes too lucrative). A mixed-strategy equilibrium always exists and is characterized. These results are robust to variations in the extensive form. The model may find applications in the media, internet trading platforms, search engine competition, social media or even health insurance (HMO/PPO).     

Chinese competition and product variety of Indian firms

Using detailed firm-product-year data across manufacturing industries in India, and exploiting the exogenous nature of China’s entry into the WTO in 2001, we investigate the link between the impact of import penetration from China on the product variety of Indian manufacturing firms. We find: (i) robust and significant effects of product drop, with the effect coming only from competitive pressure in the domestic market; (ii) robust evidence of product drop or ‘creative destruction’ only for firms belonging to the lower-half of the size distribution; (iii) firms drop their peripheral/marginal products and concentrate on the core ones; and (iv) the result is strongest for firms producing intermediate goods. For an average Indian manufacturing firm, a 10 percentage point increase in India’s Chinese share of imports in the domestic market reduces the product scope of firms by 1.7–4.4%. In contrast, we find positive effects on product scope when firms are importing intermediate goods. We also find evidence of significant productivity effects and within-firm factor reallocation. Our results are consistent to a battery of robustness checks and IV estimation.     

Price competition and innovation in markets with brand loyalty

Intuition suggests that in markets with consumer lock-in (‘brand loyalty’), firms with a large customer base earn higher profits. We show for a homogeneous goods duopoly that the intuition can be misleading, as the intensity of price competition depends on the initial market split. We derive mixed-strategy equilibria, and show that competition is often most intense when the market is split evenly. As a result, firms coordinate on an asymmetric split when consumers are not yet attached to firms. We also allow for asymmetric costs, and analyze when firms with a larger customer base are more eager to innovate.     

Price competition between subsidized organizations

Many firms and organizations compete for customers while at the same time receiving substantial funding from outside sources, such as government subsidies. In this paper, we study the effects of two commonly observed subsidy systems on the strategic behavior of competing firms. We compare a per unit subsidy to a subsidy allocated according to the firms’ market shares. We show that, holding the total subsidy budget constant, the per unit subsidy results in lower prices, higher output, lower profits and higher overall welfare as compared to the market-share based alternative. However, we also find that a market-share based subsidy makes collusive behavior between firms much harder. Our results suggest a potential trade-off between short-run and long-run objectives: subsidy systems designed to widen participation may favor collusive behavior. The welfare implications of this trade-off are discussed. Our findings have important policy implications for the design of subsidy systems.     

Price normalization under imperfect competition

In general equilibrium models of imperfect competition the equilibria depend on how prices are normalized. This note shows that a price normalization preserves convexity properties if and only if prices are measured in terms of a fixed commodity bundle. I am grateful to an anonymous referee for helpful comments, inspiring a simplification in the proof of the main result, and the argument in the Remark.     

Multidivisional firms, internal competition, and the merger paradox

Abstract.  Traditional modelling of mergers has the merged firms (insiders) cooperate and maximize joint profits. This approach has several unappealing results in quantity‐setting games, for example, mergers typically are not profitable for insiders, but are profitable for non‐merging firms (outsiders). We take a different approach and allow for a parent company that can play each insider off one another. In quantity‐setting games, with our approach mergers are profitable for insiders, unprofitable for outsiders, socially beneficial, and involve (in a non‐monopolizing merger) a small number of firms. Finally, we find that the optimal strategy depends on whether firms compete in quantity or prices. JEL classification: L000     

Price and quantity competition under free entry

This paper complements that of Cellini et al. (Cellini, R., Lambertini, L., Ottaviano, G. I. P., 2004. Welfare in a differentiated oligopoly with free entry: A cautionary note. Research in Economics, 58:125–33.), which shows that Cournot competition may generate higher welfare compared to Bertrand competition in an economy with free entry. Unlike them, we provide a more general proof for this result and show that Cournot competition generates higher welfare compared to Bertrand competition when the products are sufficiently differentiated. If the products are close substitutes, welfare is higher under Bertrand competition. We show that these qualitative results hold whether or not number of varieties increases market size. We also show when the active firms earn higher profits under Bertrand competition compared to Cournot competition.     

Price collusion with free entry: the parasitic competition

The market equilibrium that is generated in the presence of both price collusion and free entry is analyzed taking under consideration the case of a homogeneous product and the case of differentiated products. The outcomes of this market regime are compared with those of other regimes, including competition (or monopolistic competition), monopoly, fixed price with collusive entry limitation. Some welfare implications of the market regime of price collusion with free entry are examined, with respect to the maximum social welfare allocation and the allocations of other market regimes, so to highlight the inefficiency of price collusion with free entry. The number of producers results to be the maximum number of firms that can produce without incurring into losses. Therefore, social distress is caused by a displacement from the price collusion equilibrium with free entry. Its defence can thus be considered in reference to the desirability of social goals that are in contradiction with economic efficiency.     

Durable goods with quality differentiation

We study the optimal strategy of a durable-goods monopolist who can offer goods in different qualities. The key finding is that the presence of the additional sorting variable further undermines the firm's commitment problem, leading to results that contrast sharply with those of standard durable-goods models or those of models where the firm can commit.     

The cost minimizing number of firms and the discipline of competition

Starting from the premise that costs of production are partly a function of the level of competition, we proceed to analyse the implications of the trade-off between cost decreases due to rivalry and cost increases due to fragmentation of production.     

Effect of credible quality investment with Bertrand and Cournot competition

We show how credible revelation and ability to commit to quality choice effect equilibrium qualities and welfare when product market is either Bertrand or Cournot competition. We show that results depend on the type of competition but not generally on the cost of quality function. We show that with Bertrand competition, the equilibrium qualities are lower with credible commitment. Competition is moderated and producer surplus is higher and consumer surplus lower. With Cournot competition, higher quality will be better but lower quality will be worse with credible commitment. Consumer surplus is always greater with credible commitment and if cost does not increase too quickly with quality, producer surplus will also increase. Thus credible commitment is a collusive device with Bertrand competition but it can improve social welfare with Cournot competition. Received: February 8, 2000; revised version: February 14, 2002 RID="*" ID="*" The idea of this paper originated in the weekly workshops of Mordecai Kurz at Stanford. I am forever in debted to Mordecai and fellow students – Luis Cabral, Peter DeMarzo, John Hillas, Michihiro Kandori, Steve Langois, Patrick McAllister, Steve Sharpe, Peter Streufert, Steve Turnbull and Gyu-Ho Wang – for their criticism and encouragement. I also benefited from comments from Yi-Heng Chen, Jin-Li Hu, Kala Krishna, Jinji Naoto, Thomas J. Prusa, and Shyh-Fang Ueng at various later stages of this work. Last but not least, I am grateful for the detailed comments of the referee.     

Diversified growth and competition: the experience of twelve large UK firms

This paper looks at the causes and competitive consequences enterprise diversification with reference to the experience of twelve large UK firms. It is noted although the majority of these firms diversified intially for defensive reasons, continuing diversification was often undertaken to enable the firm to maintain a satisfactory rate of earnings growth. In accordance with this goal, most of the twelve firms had acquired market leaders in diverse areas. A second conclusion therefore, is that diversification can add to the total market power available to the firm. The use of this power however, appears to depend upon the management philosophy and nature of resource allocation found within the firm.