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On the Effects of Raised Rival’s Costs

Author

Listed:
  • Sreya Kolay

    (State University of New York, University at Albany, SUNY)

  • Rajeev K. Tyagi

    (University of California)

Abstract

This paper examines the effects of a rival’s cost increase in a vertically differentiated market with endogenous product qualities. It provides cost-side and demand-side conditions under which a firm gains and under which it loses from its rival’s cost increase. We show how the gain or loss depends on: (i) the absence or presence of outside options for consumers; (ii) the degree of heterogeneity in consumer taste for quality; (iii) whether the cost of producing quality involves fixed costs or variable costs; and (iv) the relative quality-production efficiencies of the competing firms.

Suggested Citation

  • Sreya Kolay & Rajeev K. Tyagi, 2022. "On the Effects of Raised Rival’s Costs," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 60(4), pages 567-586, June.
    • Handle: RePEc:kap:revind:v:60:y:2022:i:4:d:10.1007_s11151-022-09853-2
    DOI: 10.1007/s11151-022-09853-2
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    References listed on IDEAS

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