Relax Price Competition Research Articles

Import Quotas Foster Product Imitation in Vertically Differentiated Duopolies

Krishna [89] shows that quotas may act as facilitating devices by relaxing price competition. We extend her analysis by considering the following stage game : a domestic government chooses an import quota, then a domestic and a foreign firm choose the quality of their product before engaging a price competition. Because it relaxes price competition, the quota deeply affects quality choices : when costs for quality do not rise too quickly , both firms end up choosing the same highest available quality for a wide range of quota values. It is then shown that the optimal policy for the government consists in choosing the quota level which is just sufficient to induce product imitation. Once its effects on quality choice is taken into account, the quota may thus hurt the foreign firm and increase domestic welfare.

Compatibility and Bundling with Generalist and Specialist Firms

I analyze compatibility and bundling choices when one generalist firm offering both components of a system competes against two specialist firms each supplying one component only (but not the same one). I show that the generalist firm may have an incentive to choose incompatibility or engage in pure bundling when one component is less differentiated than the other. In this case, the system is more differentiated than the relatively undifferentiated component, and so under incompatibility the specialist firm that produces the undifferentiated component will relax price competition. This may result in higher profits for some of the competing firms.

Product Differentiation and Price Competition Between a Safe and a Risky Seller

We consider a market served by a safe and a risky seller. While the expensive safe seller can solve the problems of all consumers, the cheap risky seller can help a consumer only with a certain probability. The risky seller's success probabilities are distributed across consumers, and by the choice of her quality the risky seller determines the shape of this distribution. If the risky seller fails, a consumer ends up with the safe seller, paying for the service twice. We study the price-quality competition between the two providers. We show that the principle of maximum product differentiation does not hold in our model, i.e., the risky seller does not choose the minimum quality level in order to relax price competition.

Market structure, innovation and vertical product differentiation

We reassess Arrow's (1962) [Economic Welfare and the Allocation of Resources for Invention, in NBER, The Rate and Direction of Innovative Activity (Princeton University Press, Princeton NJ)] results concerning the effect of market structure on the returns from process innovation. Here we consider product innovations that are vertically differentiated from older products, in the sense of Shaked and Sutton (1982) (Relaxing Price Competition through Product Differentiation, Review of Economic Studies 49, 3–13.), Shaked and Sutton (1983) (Natural Oligopolies, Econometrica 51, 1469–1484.). Competition and monopoly in the old product market provide identical returns to innovation when (i) the monopolist is protected from new product entry, and (ii) innovation is non-drastic, in the sense that the monopolist supplies positive quantities of both old and new products. If the monopolist can be threatened with entry, monopoly provides strictly greater incentives. Welfare may be greater under monopoly when innovation is valuable.

Revisiting Dynamic Duopoly with Consumer Switching Costs

The degree of collusiveness of a market with consumer switching costs is analyzed in an infinite-horizon model of duopolistic competition. In contrast with previous analyses, we assume that firms compete for the demand for a homogeneous good by setting prices simultaneously in each period. This problem is formulated as a simple stochastic game, and a symmetric stationary Markovian perfect equilibrium with distinctive economic features is studied. We show that switching costs unambiguously relax price competition in equilibrium but that, on the contrary, they may make tacit collusion more difficult to sustain. Journal of Economic Literature Classification Numbers: C73, D43, L13.

Product and Price Competition in a Two-Dimensional Vertical Differentiation Model

In this paper, the one-dimensional vertical differentiation model (Shaked and Sutton [Shaked, A., J. Sutton. 1982. Relaxing price competition through product differentiation. Rev. Econom. Stud. 49 3–13.], Moorthy [Moorthy, K. S. 1988. Product and price competition in a Duopoly. Marketing Sci. 7(Spring) 141–168.]) is extended to two dimensions and an analysis of product and price competition is presented. A two-stage game theoretic analysis in which two firms compete first on product positions and then on price is conducted. Closed form equilibrium solutions are obtained for each stage in which competitors are unrestricted in their choices of price or product positions. A significant finding of this research is that unlike the one-dimensional vertical differentiation model, firms do not tend towards maximum differentiation, although this solution is possible under certain conditions. When the range of positioning options on each of the dimensions is equal, MaxMin product differentiation occurs. That is, in equilibrium, the two firms tend to choose positions which will represent maximum differentiation on one dimension and minimum differentiation on the other dimension.

Economic Organizations as Games.

Part 1 Equilibrium theory: the existence of equilibrium in discontinuous economic games - theory, application, P.Dasgupta and E.Maskin. Part 2 Imperfect competition: on the rate of convergence of oligopoly equilibria in large markets - an example, P.Dasgupta and Y.Ushio natural oligopolies, A.Shaked and J.Sutton relaxing price competition through product differentiation, A.Shaked and J.Sutton the theory of technological competition, P.Dasgupta strategic considerations in invention and innovation - the case of natural resources, P.Dasgupta, R.Gilbert and J.E.Stiglitz. Part 3 The design of organisations: on the revelation principle under complete and incomplete information, R.Repullo optimal incentive schemes with many agents, D.Mookherjee.

PRODUCT COMPATIBILITY CHOICE IN A MARKET WITH TECHNOLOGICAL PROGRESS*

In markets where advantages, e.g., network ex ternalities, are significant, firms' product compatibility choices are an import ant determinant of industry performance. This paper compares the private and soc ial incentives to achieve compatibility in a two-period duopoly model with (poss ible stochastic) technological progress. Earlier analysis using static models fo und that the social incentives to achieve industrywide compatibility always exce ed the private incentives. Here the authors find that private firms may have soc ially excessive compatibility incentives because compatibility serves as a means of relaxing price competition during early stages of industry growth. Copyright 1986 by Royal Economic Society.

Relaxing Price Competition Through Product Differentiation

Central to the problem of providing adequate foundations for the analysis of monopolistic competition, is the problem of describing market equilibria in which firms choose both the specification of their respective products, and their prices. The present paper is concerned with a-very particular-model of such a market equilibrium. In this equilibrium, exactly two potential entrants will choose to enter the industry; they will choose to produce differentiated products; and both will make positive profits.