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Multi-Product Duopoly With Cross-Product Cost Interdependencies

Author

Listed:
  • Gary Biglaiser

    (University of North Carolina)

  • Andrei Hagiu

    (Harvard Business School, Strategy Unit)

Abstract

Many multi-product firms incur a complexity fixed cost when offering different product lines in different quality tiers relative to the case when offering all products lines in the same quality tier (high or low). Such fixed costs create an interdependency between firms' choices of quality tiers across different product lines, even when demands are independent. We investigate the effects of this interdependency on equilibrium profits in a Stackelberg duopoly game. Both firms' profits are (weakly) higher when the complexity cost is infinite than when it is 0. The Stackelberg leader's profits are always (weakly) higher with a positive complexity fixed cost, but its profits can be non-monotonic in the magnitude of this cost. The Stackelberg follower's profits can be lower when the complexity fixed cost is positive than when it is equal to 0.

Suggested Citation

  • Gary Biglaiser & Andrei Hagiu, 2015. "Multi-Product Duopoly With Cross-Product Cost Interdependencies," Harvard Business School Working Papers 16-010, Harvard Business School.
    • Handle: RePEc:hbs:wpaper:16-010
    as

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    File URL: http://www.hbs.edu/faculty/pages/download.aspx?name=16-010.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    multi-product duopoly; vertical differentiation; fixed costs.;
    All these keywords.

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • L8 - Industrial Organization - - Industry Studies: Services

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