Price Competition in a Vertizontally Differentiated Duopoly
Iwan Bos and
Ronald Peeters ()
No 17, Research Memorandum from Maastricht University, Graduate School of Business and Economics (GSBE)
This paper analyzes price competition in a duopoly market in which products are both horizontally and vertically differentiated. Firms offer a basic and a premium product to buyers, some of whom are brand loyal. We establish the existence of a unique and symmetric Nash pricing equilibrium. Equilibrium prices are increasing in the degree of horizontal differentiation and the amount of brand loyal customers. The equilibrium price of the basic (premium) good is decreasing (increasing) in the quality difference and profits can increase in costs when this difference is high enough. If the pricing decision is taken at the product (division) level, then there is again a unique (and symmetric) Nash equilibrium. Equilibrium prices and profits are lower than in the centralized case and demand for the basic product is higher when the quality difference is sufficiently large. Welfare is unambiguously lower with decentralized pricing.
JEL-codes: D43 L13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-gth, nep-ind, nep-mic and nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:unm:umagsb:2019017
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