The Dynamic Provision of Product Diversity under Duopoly

Ramon Caminal

No 1045, Working Papers from Barcelona School of Economics

Abstract: This paper builds a dynamic duopoly model to examine the provision of new varieties over time. Consumers experience temporary satiation, and hence higher consumption of the current variety lowers demand for future varieties. The equilibrium can be characterized by a combination of monopolistic pricing and nearly zero profits (competitive timing). In particular, if the cost of producing a new variety is not too low then firms tend to avoid head-to-head competition and set the short-run profit-maximizing price. However, firms tend to introduce new varieties as soon as demand has grown sufficiently to cover costs. From a second best perspective, the equilibrium may exhibit excessive product diversity. However, if firms coordinate their frequency of new product introductions, then consumers are likely to be harmed. It is also shown that equilibrium prices are moderated by two factors. First, consumers' option value of waiting reduces their willingness to pay. Second, competition reduces firms' incentives to engage in intertemporal price discrimination.

Keywords: repeat purchases; temporary satiation; product diversity; dynamic duopoly; endogenous timing (search for similar items in EconPapers)
JEL-codes: L13 (search for similar items in EconPapers)
Date: 2018-06
New Economics Papers: this item is included in nep-com, nep-ind and nep-knm
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Citations: View citations in EconPapers (1)

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Journal Article: The dynamic provision of product diversity under duopoly (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:bge:wpaper:1045

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