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Price Competition and Setup Cost

Rui Ota and Hiroshi Fujiu
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Rui Ota: Department of Economics and Business Administration, Yokohama City University, 22-2 Seto, Kanazawa, Yokohama 236-0027, Japan
Hiroshi Fujiu: Department of Economics, Chiba Keizai University, 3-59-5 Todoroki, Inage, Chiba 263-0021, Japan

Mathematics, 2021, vol. 9, issue 3, 1-15

Abstract: Few studies analyze the endogenous emergence of price competition in a new product market. This paper analyzes two differentiated products, an existing product and a newly introduced substitutable product, and investigates conditions under which a price competition endogenously emerges in a new product market in the context of a choice between engaging in price competition and holding price leadership. We demonstrate that Bertrand price competition emerges when the setup cost for the new product is high enough. This result implies that government policies reducing setup costs such as subsidies could change the type of competition to price leadership in a new product market.

Keywords: new product; price competition; price leadership; endogenous timing game (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2021
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