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Competitive Nonlinear Pricing and Contract Variety
Author(s) -
Shen Jian,
Yang Huanxing,
Ye Lixin
Publication year - 2016
Publication title -
the journal of industrial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.93
H-Index - 77
eISSN - 1467-6451
pISSN - 0022-1821
DOI - 10.1111/joie.12094
Subject(s) - duopoly , monopoly , product differentiation , product line , competition (biology) , industrial organization , product (mathematics) , business , price discrimination , nonlinear pricing , variety (cybernetics) , microeconomics , economics , marketing , computer science , cournot competition , ecology , geometry , mathematics , engineering , biology , manufacturing engineering , artificial intelligence
We analyze markets with both horizontally and vertically differentiated products under both monopoly and duopoly. In the base model with two consumer types, we identify conditions under which entry prompts an incumbent to expand or contract its low end of the product line. Our analysis offers a novel explanation for the widespread use of ‘fighting brands’ and ‘product line pruning.’ We also extend our analysis to asymmetric firms and three types of consumers and show that depending on the specific environment, entry may lead the incumbent to expand or contract the middle range of its product line (middle contracts). Our results are mainly driven by interactions between horizontal differentiation (competition) and vertical screening of consumers.