2006 Reports

Price-increasing competition

Chen, Yongmin; Riordan, Michael H.

In a discrete choice model of product differentiation, the symmetric duopoly price may be lower than, equal to, or higher than the single-product monopoly price. While the market share effect of competition encourages a firm to charge less than the monopoly price because a duopolist serves fewer consumers, the price sensitivity effect of competition motivates a higher price when more consumer choice steepens the firm's demand curve. The joint distribution of consumer values for the two conceivable products determines the relative strength of these effects, and whether presence of a symmetric competitor results in a higher or lower price compared to single-product monopoly. The analysis reveals that rice-increasing competition is unexceptional from a theoretical perspective.