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

Ryoma Kitamura () and Tetsuya Shinkai ()

No 113, Discussion Paper Series from 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.

Keywords: Multi-product firm; Duopoly; Cannibalization; Vertical product differentiation (search for similar items in EconPapers)
JEL-codes: D21 D43 L13 L15 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2014-01, Revised 2014-01
New Economics Papers: this item is included in nep-bec and nep-com
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:kgu:wpaper:113

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