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Cocktails done right: price competition and welfare when substitutes become complements

Matteo Alvisi () and Emanuela Carbonara ()
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Matteo Alvisi: University of Bologna
Emanuela Carbonara: University of Bologna

Journal of Economics, 2020, vol. 131, issue 1, No 1, 38 pages

Abstract: Abstract In this paper we analyze the effects of the introduction (by either firms or authorities) of a composite good consisting of a fixed proportion of two imperfectly substitutable stand-alone products. First, we find that such a “cocktail” rises the Bertrand equilibrium prices as it introduces a certain degree of complementarity. It also creates incentives to price discriminate and products can be sold at a discount or at a premium (depending on their degree of substitutability) when they are used as part of the composite good. We consider two distinct forms of price discrimination: a traditional one, in which producers set their prices independently of each other and a coordinated one, in which producers cooperate (collude) when setting the price of the composite good. Composite goods might have either a positive or a negative impact on consumer surplus. The sign of the impact depends on the form of price discrimination and consumers tend to be better off if producers coordinate. The impact is also more likely to be positive if “cocktails are done right”, i.e., if their quality is high compared to the quality of the stand-alone products.

Keywords: Complements; Vertical differentiation; Price discounts and premia; Price discrimination; Excessive pricing; Pharmaceutical markets (search for similar items in EconPapers)
JEL-codes: C7 D42 D43 K21 L11 L12 L13 L40 M21 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s00712-020-00690-z

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