Niche vs. central firms: pattern of technology choice and cost-price dynamics in a differentiated oligopoly

Abstract

ABSTRACT We investigate whether and how positions in the characteristics space influence technological adoption and how price levels are affected; furthermore we assess the effects of policy interventions. In an industry where a central firm competes with two peripheral/niche ones, two technologies are available: one with low marginal and high fixed costs and one with opposite pattern. The central firm is in direct competition with all the rivals. We show that this firm has higher incentives to adopt the technology efficient at large production scale; consequently if fixed cost decreases, the diffusion of this technology in the industry starts from the center and then spreads over to the niche firms. Changes in fixed and marginal costs affect long-run prices in non-obvious way. On the normative side, subsidies affect the technology pattern and deliver relevant effects: lump-sum subsidies increase consumer surplus, but can reduce profits. A price-cap that forestalls a technological change improves welfare. Our analysis is well-suited to analyze the digitalization process that has taken place in the last years.