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Why are firms sometimes unwilling to reduce costs?

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  • X. Wang
  • Jingang Zhao

Abstract

This paper establishes three new results for multiproduct oligopolies: 1) it presents the first explicit expression of Nash equilibria for asymmetric multiproduct oligopolies; 2) it shows that reducing a multiproduct firms cost in Bertrand oligopolies will reduce its profits if the cost-reducing unit is sufficiently small; and 3) it demonstrates that a multiproduct firm has no incentive to eliminate a product whose sales are zero. Because a single-product firm whose sales are zero is indifferent between exiting and staying, and its cost reductions always increase its profits, our results are unique to the multiproduct firm, and they suggest that extending oligopoly studies from a single product to multi-products could be as significant as the extension of calculus from a single variable to multi-variables.
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  • X. Wang & Jingang Zhao, 2010. "Why are firms sometimes unwilling to reduce costs?," Journal of Economics, Springer, vol. 101(2), pages 103-124, October.
    • Handle: RePEc:kap:jeczfn:v:101:y:2010:i:2:p:103-124
    DOI: 10.1007/s00712-010-0148-x
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    Cited by:

    1. Duarte Brito & Markos Tselekounis, 2017. "On the Impact of Input Prices on an Entrant’s Profit Under Multi-Product Competition," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 50(1), pages 105-125, February.
    2. Aymeric Lardon, 2017. "On the Coalitional Stability of Monopoly Power in Differentiated Bertrand and Cournot Oligopolies," GREDEG Working Papers 2017-10, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France.
    3. Aymeric Lardon, 2019. "On the coalitional stability of monopoly power in differentiated Bertrand and Cournot oligopolies," Theory and Decision, Springer, vol. 87(4), pages 421-449, November.
    4. Wang, X. Henry & Zhao, Jingang, 2022. "Merger effects in asymmetric and differentiated Bertrand oligopolies," Mathematical Social Sciences, Elsevier, vol. 120(C), pages 37-49.
    5. Friedel Bolle, 2011. "Over- and under-investment according to different benchmarks," Journal of Economics, Springer, vol. 104(3), pages 219-238, November.

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    More about this item

    Keywords

    Effect of cost reduction; Multiproduct oligopoly; Price competition; C63; D43; L13;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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