Asymmetries in cost structures and incentives towards price competition

Abstract

This paper provides some theoretical grounds to relate asymmetries in cost structures and incentives towards price competition. Typically low cost firms favor price competition whereas the reserve is true for high cost firms. Increased price competition will tend to diminish price-cost margins for all firms but the low cost firms may increase their total profits through an enlarged market share. This analysis depends on two relevant parameters: the way the overall market will react to increased price competition and interfirm cross elasticities. This is proved using comparative statics at the Nash equilibrium of an oligopolistic model.