On the Effects of Raised Rival’s Costs

Sreya Kolay () and Rajeev K. Tyagi ()
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Sreya Kolay: State University of New York, University at Albany, SUNY
Rajeev K. Tyagi: University of California

Review of Industrial Organization, 2022, vol. 60, issue 4, No 4, 567-586

Abstract: 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.

Keywords: Quality competition; Raising rivals’ costs; Vertical differentiation (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s11151-022-09853-2

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