IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/119499.html
   My bibliography  Save this paper

Spatial Competition in a Differentiated Market with Asymmetric Costs

Author

Listed:
  • Selim, Tarek

Abstract

Spatial quality choice is introduced, where consumers are horizontally differentiated by taste and firms vertically differentiated by quality location, within an equilibrium model of duopoly competition characterized by asymmetric fixed and variable costs. Firms choose quality location followed by prices but then may vertically re-locate their quality offerings based on changing horizontal consumer taste. A monopolistic equilibrium solution arises with firms achieving positive economic profits through price-quality markups exceeding marginal costs. Under strict inequality conditions, each firm acts as a monopolistic competitor within a range of quality choices governed by multiple relative differentiation outcomes. On the other hand, vertical re-location exhibits a resistance to change on the part of vertically located firms such that firms dislike quality re-location and prefer stable preferences in quality. Such resistance to change is overcome by firms re-locating their quality offerings to maximize monopolistic brand-space gains. It is argued that more horizontal differentiation may force more product differentiation by vertical quality relocation. A relative change in quality preferences may result in wider quality spreads in the market through vertical quality re-locations, even though the resistance to change arguments may still hold good.

Suggested Citation

  • Selim, Tarek, 2006. "Spatial Competition in a Differentiated Market with Asymmetric Costs," MPRA Paper 119499, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:119499
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/119499/1/MPRA_paper_119499.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Gilbert, Richard J & Matutes, Carmen, 1993. "Product Line Rivalry with Brand Differentiation," Journal of Industrial Economics, Wiley Blackwell, vol. 41(3), pages 223-240, September.
    2. Motta, Massimo, 1993. "Endogenous Quality Choice: Price vs. Quantity Competition," Journal of Industrial Economics, Wiley Blackwell, vol. 41(2), pages 113-131, June.
    3. Avner Shaked & John Sutton, 1982. "Relaxing Price Competition Through Product Differentiation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 49(1), pages 3-13.
    4. Byoung Jun & Xavier Vives, 1996. "Learning and Convergence to a Full-Information Equilibrium are not Equivalent," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 63(4), pages 653-674.
    5. David Levhari & Yoram Peles, 1973. "Market Structure, Quality and Durability," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 235-248, Spring.
    6. Beath,John & Katsoulacos,Yannis, 1991. "The Economic Theory of Product Differentiation," Cambridge Books, Cambridge University Press, number 9780521335522, October.
    7. Avinash Dixit, 1979. "A Model of Duopoly Suggesting a Theory of Entry Barriers," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 20-32, Spring.
    8. Cremer, Helmuth & Thisse, Jacques-Francois, 1991. "Location Models of Horizontal Differentiation: A Special Case of Vertical Differentiation Models," Journal of Industrial Economics, Wiley Blackwell, vol. 39(4), pages 383-390, June.
    9. Asher Wolinsky, 1983. "Prices as Signals of Product Quality," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 50(4), pages 647-658.
    10. Schmalensee, Richard, 1979. "Market Structure, Durability, and Quality: A Selective Survey," Economic Inquiry, Western Economic Association International, vol. 17(2), pages 177-196, April.
    11. Kim, Jong Seok, 1987. "Optimal Price-Quality Schedules and Sustainability," Journal of Industrial Economics, Wiley Blackwell, vol. 36(2), pages 231-244, December.
    12. Reitman, David, 1991. "Endogenous Quality Differentiation in Congested Markets," Journal of Industrial Economics, Wiley Blackwell, vol. 39(6), pages 621-647, December.
    13. Jean Tirole, 1996. "A Theory of Collective Reputations (with applications to the persistence of corruption and to firm quality)," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 63(1), pages 1-22.
    14. Boyer, Marcel & Moreaux, Michel, 1987. "On Stackelberg Equilibria with Differentiated Products: The Critical Role of the Strategy Space," Journal of Industrial Economics, Wiley Blackwell, vol. 36(2), pages 217-230, December.
    15. Leonard Cheng, 1985. "Comparing Bertrand and Cournot Equilibria: A Geometric Approach," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 146-152, Spring.
    16. Nirvikar Singh & Xavier Vives, 1984. "Price and Quantity Competition in a Differentiated Duopoly," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 546-554, Winter.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Tarek Selim, 2004. "Endogenous quality choice: price and quantity competition," Economics Bulletin, AccessEcon, vol. 28(3), pages 1.
    2. Ya‐chin Wang & Leonard F.s. Wang, 2009. "Equivalence Of Competition Mode In A Vertically Differentiated Duopoly With Delegation," South African Journal of Economics, Economic Society of South Africa, vol. 77(4), pages 577-590, December.
    3. Bilanakosa, Christos & Heywood, John S. & Sessions, John & Theodoropoulos, Nikolaos, 2017. "Worker Training and Quality Competition," GLO Discussion Paper Series 137, Global Labor Organization (GLO).
    4. Luciano Fanti & Nicola Meccheri, 2015. "On the Cournot–Bertrand Profit Differential and the Structure of Unionisation in a Managerial Duopoly," Australian Economic Papers, Wiley Blackwell, vol. 54(4), pages 266-287, December.
    5. Luciano Fanti & Luca Gori, 2013. "Stability Analysis in a Bertrand Duopoly with Different Product Quality and Heterogeneous Expectations," Journal of Industry, Competition and Trade, Springer, vol. 13(4), pages 481-501, December.
    6. James A. Brander & Barbara J. Spencer, 2015. "Endogenous Horizontal Product Differentiation under Bertrand and Cournot Competition: Revisiting the Bertrand Paradox," NBER Working Papers 20966, National Bureau of Economic Research, Inc.
    7. Fanti, Luciano & Gori, Luca & Mammana, Cristiana & Michetti, Elisabetta, 2013. "The dynamics of a Bertrand duopoly with differentiated products: Synchronization, intermittency and global dynamics," Chaos, Solitons & Fractals, Elsevier, vol. 52(C), pages 73-86.
    8. Ryo Hashizume & Tatsuhiko Nariu, 2020. "Price and quantity competition with network externalities: Endogenous choice of strategic variables," Manchester School, University of Manchester, vol. 88(6), pages 847-865, December.
    9. Wang, Shinn-Shyr & Stiegert, Kyle W., 2006. "The Duopolistic Firm with Endogenous Risk Control: Case of Persuasive Advertising and Product Differentiation," Staff Paper Series 496, University of Wisconsin, Agricultural and Applied Economics.
    10. Lutz, Stefan H., 2002. "The Effects of Quotas on Vertical Intra-Industry Trade," ZEW Discussion Papers 02-61, ZEW - Leibniz Centre for European Economic Research.
    11. Manipushpak Mitra & Rupayan Pal & Arindam Paul & P. M. Sharada, 2020. "Equilibrium Coexistence of Public and Private Firms and the Plausibility of Price Competition," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 176(2), pages 217-242.
    12. Lambertini, Luca, 1997. "Prisoners' Dilemma in Duopoly (Super)Games," Journal of Economic Theory, Elsevier, vol. 77(1), pages 181-191, November.
    13. Manez, J.A. & Waterson, M., 2001. "Multiproduct Firms and Product Differentiation: a Survey," The Warwick Economics Research Paper Series (TWERPS) 594, University of Warwick, Department of Economics.
    14. Swapnendu Bandyopadhyay & Rajat Acharyya, 2004. "Process and Product Innovation: Complementarity in a Vertically Differentiated Monopoly with Discrete Consumer Types," The Japanese Economic Review, Japanese Economic Association, vol. 55(2), pages 175-200, June.
    15. Pennerstorfer, Dieter & Weiss, Christoph R., 2012. "On the Relative Disadvantage of Cooperatives: Vertical Product Differentiation in a Mixed Oligopoly," Journal of Rural Cooperation, Hebrew University, Center for Agricultural Economic Research, vol. 40(1), pages 1-32.
    16. Ciprian Rusescu & Mihai Daniel Roman, 2020. "Product Differentiation Impact on Games Theory Models," Ovidius University Annals, Economic Sciences Series, Ovidius University of Constantza, Faculty of Economic Sciences, vol. 0(2), pages 500-508, December.
    17. Gilbert, John & Koska, Onur A. & Oladi, Reza, 2022. "The scope for strategic asymmetry under international rivalry," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 464-468.
    18. Wang, Shinn-Shyr & Stiegert, Kyle W., 2006. "The Duopolistic Firm with Endogenous Risk Control: Case of Persuasive Advertising and Product Differentiation," Staff Papers 12606, University of Wisconsin-Madison, Department of Agricultural and Applied Economics.
    19. Mario Pezzino, 2010. "Minimum Quality Standards with More Than Two Firms Under Cournot Competition," The IUP Journal of Managerial Economics, IUP Publications, vol. 0(3), pages 26-45, August.
    20. Mónica Correa‐López, 2007. "Price and Quantity Competition in a Differentiated Duopoly with Upstream Suppliers," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 16(2), pages 469-505, June.

    More about this item

    Keywords

    Vertical differentiation; horizontal consumer taste; quality competition; quality relocation; price-quality signals; monopolistic brand space; spatial competition; resistance to change; quality spreads; multiple differentiation; relative brand-space positioning;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:119499. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.