Price Competition in a Vertizontally Differentiated Duopoly

Iwan Bos, Ronald Peeters

Research output: Working paperProfessional

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Abstract

This paper analyzes price competition in a duopoly market in which products are both horizontally and vertically differentiated. Firms offer a basic and a premium product to buyers, some of whom are brand loyal. We establish the existence of a unique and symmetric Nash pricing equilibrium. Equilibrium prices are increasing in the degree of horizontal differentiation and the amount of brand loyal customers. The equilibrium price of the basic (premium) good is decreasing (increasing) in the quality difference and profits can increase in costs when this difference is high enough. If the pricing decision is taken at the product (division) level, then there is again a unique (and symmetric) Nash equilibrium. Equilibrium prices and profits are lower than in the centralized case and demand for the basic product is higher when the quality difference is sufficiently large. Welfare is unambiguously lower with decentralized pricing.
Original languageEnglish
PublisherMaastricht University, Graduate School of Business and Economics
Number of pages16
Publication statusPublished - 20 Jun 2019

Publication series

SeriesGSBE Research Memoranda
Number017

JEL classifications

  • d43 - Market Structure and Pricing: Oligopoly and Other Forms of Market Imperfection
  • l13 - Oligopoly and Other Imperfect Markets

Keywords

  • vertizontal differentiation
  • pricing
  • multiproduct oligopoly

Cite this

Bos, I., & Peeters, R. (2019). Price Competition in a Vertizontally Differentiated Duopoly. Maastricht University, Graduate School of Business and Economics. GSBE Research Memoranda, No. 017