Abstract
Few studies analyze the endogenous emergence of price competition in a new product market. This paper analyzes two differentiated products, an existing product and a newly introduced substitutable product, and investigates conditions under which a price competition endogenously emerges in a new product market in the context of a choice between engaging in price competition and holding price leadership. We demonstrate that Bertrand price competition emerges when the setup cost for the new product is high enough. This result implies that government policies reducing setup costs such as subsidies could change the type of competition to price leadership in a new product market.
Highlights
In a market where new products replace existing commodities, we often observe that an innovative firm and subsequent firms engage in price competition
From the aspect of the homogeneous product model, which is adopted by Cabon-Dhersin and Drouhin [16] and Routledge and Edwards [17], our model shows that Bertrand price competition in a new product market appears depending on the size of the setup cost
Little is known about the rationale behind the emergence of price competition in a new product market
Summary
In a market where new products replace existing commodities, we often observe that an innovative firm and subsequent firms engage in price competition. Because the new product is homogeneous, our study forms part of the literature on price competition in a homogeneous product market, for example, Ono [8], Tasnádi [9], Dastidar and Furth [10], Yano and Komatsubara [11], Komatsubara [12], and Hirata and Matsumura [13] Different from these studies, this paper studies a differentiated product to analyze the common scenario in which a new product replaces an existing product. While Dastidar [5] and Yano and Komatsubara [2] demonstrate that differences in marginal cost of firms play an important role to explain the emergence of Bertrand competition, our paper provides a new factor, non-sunk setup cost, for the appearance.
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