Abstract
This paper conducts a welfare analysis in a duopoly with differentiated and substitutable goods composed of one consumer-friendly firm and one absolute profit maximizing firm. We suppose that the consumer-friendly firm maximizes the weighted sum of its absolute profit and consumer surplus. In such a duopoly, when the degree of product differentiation is sufficiently high and the weight that the consumer-friendly firm puts on consumer surplus in its objective function is sufficiently high, the equilibrium social welfare is larger in the quantity competition than in the price competition, which implies that the result is reverse of that obtained in the standard duopoly with substitutable goods composed of absolute profit maximizing firms.
Highlights
This paper compares the equilibrium market outcomes between the quantity competition and the price competition in a duopoly with differentiated and substitutable goods composed of one consumer-friendly firm and one absolute profit-maximizing firm
We show that the equilibrium social welfare can be larger in the quantity competition than in the price competition, even in the duopoly with differentiated and substitutable goods, when the degree of production differentiation is sufficiently high and the extent of the importance of consumer surplus to the consumerfriendly firm is relatively high4
Consumer surplus of the consumer-friendly firm and found that the equilibrium social welfare can be larger in the quantity competition than in the price competition, which is strikingly different from the result obtained in the standard duopoly with substitutable goods composed of absolute profit-maximizing firms only
Summary
This paper compares the equilibrium market outcomes between the quantity competition and the price competition in a duopoly with differentiated and substitutable goods composed of one consumer-friendly firm and one absolute profit-maximizing firm. The purpose of this paper is to find whether or not there exists a condition on the degree of product differentiation and the extent of the importance that the consumerfriendly firm places on consumer surplus such that the ranking order of the equilibrium social welfare between the quantity competition and the price competition becomes the reverse of that obtained in the standard duopoly with substitutable goods composed of absolute profit-maximizing firms. We show that the equilibrium social welfare can be larger in the quantity competition than in the price competition, even in the duopoly with differentiated and substitutable goods, when the degree of production differentiation is sufficiently high and the extent of the importance of consumer surplus to the consumerfriendly firm is relatively high. We will derive the equilibrium market outcomes both in the quantity competition and in the price competition
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