The Existence of Low-End Firms May Help High-End Firms

Ikuo Ishibashi () and Noriaki Matsushima
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Ikuo Ishibashi: Faculty of Economics, Aoyama Gakuin University, 4-4-25 Shibuya, Shibuya-ku, Tokyo 150-8366 Japan

Marketing Science, 2009, vol. 28, issue 1, 136-147

Abstract: Two models of competition between high-end and low-end products benefiting the high-end firms are presented. One is a quantity competition model, and the other is a price competition model with product differentiation. The key factor is the existence of two heterogeneous consumer groups: those who demand only high-end (name-brand) products and those who care little whether products are high or low end. We show that, under certain conditions, the profits of firms in the high-end market are larger when there are firms producing low-end products than when there are not. The existence of price-sensitive consumers who care little about product quality intensifies competition among the high-end firms. The existence of low-end firms functions as a credible threat, which induces the high-end firms not to overproduce because price-sensitive consumers buy products from the low-end firms. The result provides a new theoretical mechanism concerning the profitability and pricing of national brand firms after the entry of private labels. It has an implication for pricing and marketing strategies: Established firms should not decrease their prices after the entry of nonestablished firms.

Keywords: marketing strategy; pricing research; product positioning; game theory (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (32)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormksc:v:28:y:2009:i:1:p:136-147

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