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Cannibalization may Allow a Cost-inefficient Firm to Earn more than a Cost-effcient Firm in a Duopoly with Two Vertically Differentiated Goods

Author

Listed:
  • Ryoma Kitamura

    (Graduate School of Economics, Kwansei Gakuin University)

  • Tetsuya Shinkai

    (School of Economics, Kwansei Gakuin University)

Abstract

We consider cannibalization in a duopoly model in which firms with diffrent costs supply two vertically differentiated products in the same market. We find that an increase in the difference in quality between the two goods or a decrease in the marginal cost of the high-quality goods leads to cannibalization, such that the high-quality goods keep out the low-quality goods from the market. We show that, in equilibrium, cannibalization aspects the product line of firms. As a result, an inefficient firm may earn more than the efficient firm. If the difference in the quality of the two goods is small enough, an increase in the production costs of the inefficient firm improves social welfare.

Suggested Citation

  • Ryoma Kitamura & Tetsuya Shinkai, 2014. "Cannibalization may Allow a Cost-inefficient Firm to Earn more than a Cost-effcient Firm in a Duopoly with Two Vertically Differentiated Goods," Discussion Paper Series 113, School of Economics, Kwansei Gakuin University, revised Jan 2014.
    • Handle: RePEc:kgu:wpaper:113
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    References listed on IDEAS

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    1. Glenn Ellison, 2005. "A Model of Add-On Pricing," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(2), pages 585-637.
    2. Justin P. Johnson & David P. Myatt, 2003. "Multiproduct Quality Competition: Fighting Brands and Product Line Pruning," American Economic Review, American Economic Association, vol. 93(3), pages 748-774, June.
    3. Motta, Massimo, 1993. "Endogenous Quality Choice: Price vs. Quantity Competition," Journal of Industrial Economics, Wiley Blackwell, vol. 41(2), pages 113-131, June.
    4. Valletti, Tommaso M, 2000. "Minimum Quality Standards under Cournot Competition," Journal of Regulatory Economics, Springer, vol. 18(3), pages 235-245, November.
    5. Ryoma Kitamura & Tetsuya Shinkai, 2013. "The Economics of Cannibalization: A Duopoly in which Firms Supply Two Vertically Differentiated Products," Discussion Paper Series 100, School of Economics, Kwansei Gakuin University, revised Feb 2013.
    6. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-440, June.
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    Cited by:

    1. Ryoma Kitamura & Tetsuya Shinkai, 2014. "Strategic Choice on Product Line in Vertically Differentiated Duopoly," Discussion Paper Series 120, School of Economics, Kwansei Gakuin University, revised Aug 2014.
    2. Ryoma Kitamura, 2014. "Network externalities between carriers or machines:How they work in the smartphone industry," Discussion Paper Series 117, School of Economics, Kwansei Gakuin University, revised Mar 2014.

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    More about this item

    Keywords

    Multi-product firm; Duopoly; Cannibalization; Vertical product differentiation;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • 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
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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