Product Differentiation in a Vertical Structure

We consider final goods producers’ preference for horizontal product differentiation in the presence of strategic input price determination. Final goods producers may not prefer maximal differentiation but may prefer moderate differentiation under both Cournot and Bertrand competition in the final goods market if product differentiation does not increase the market size significantly and there is either free entry in the input market or the input supplier has increasing returns to scale technology. Thus, we provide a new rationale for moderate product differentiation. Our reasons are different from the existing reasons of mixed pricing strategy, endogenous leadership, no-buy option for the consumers and the relative performance incentive schemes.

Patents versus rewards: the implications of production inefficiency

It is believed that if there is no informational asymmetry between firms and the government, firms could be remunerated for innovation using optimal taxation rather than patents. We show that under reasonable conditions (such as the government’s inability to customise the tax rate for each firm), patent protection is preferable to a tax/subsidy scheme if the marginal costs of the imitators are sufficiently higher than that of the innovator. Otherwise, the tax/subsidy scheme is preferable. These results hold under Cournot and Bertrand competition with product differentiation, but not for the case of Bertrand competition with homogeneous products. We rationalise these findings as the results of a trade-off between the distortions induced by monopoly under patents and production inefficiency under the tax/subsidy scheme.

Price Versus Quantity Competition in a Vertically Related Market with Retailer’s Effort

Allowing downstream retailers to engage in demand-enhancing investment, this paper demonstrates that the classical conclusions regarding the comparison of Cournot and Bertrand competition in a vertically related market with decentralized bargaining are completely reversed. It shows that Bertrand competition is more efficient than Cournot competition, in the sense that both consumer surplus and social welfare are always higher in the former.

Cournot and Bertrand Competition in the Software Industry

In a software industry based on a platform firm and two firms producing differentiated applications complementary to the platform, we investigate the effects on profits and welfare of the choice of different contracts (price versus quantity) by the application firms. In contrast to the traditional result, (1) equilibrium profits are higher under Cournot or Bertrand competition depending upon the degree of complementarity between platform and application producers as well as the degree of substitutability between applications; (2) the social welfare may be higher under Cournot when the application products are highly substitutable.

Cournot and Bertrand Competition in a Model of Spatial Price Discrimination with Differentiated Products

This study investigates spatial price discrimination with two types of market competition – price competition and quantity competition – and two kinds of cross-relations between goods – substitutes and complements – with endogenous location choices in a barbell model. The results herein present that the maximum differentiation (end point agglomeration) is the unique location equilibrium with substitutes (complements), irrespective of what type of competition. We demonstrate that if the unit transportation rate is sufficiently high, then consumer surplus, profits, and social welfare are higher under price competition than under quantity competition for both substitutes and complements. This means that introducing a spatial barrier to competition generated through transportation costs may solve the problem of inconsistency from the conflict interests between consumers, firms, and a social planner.

Can Horizontal Mergers Without Synergies Increase Consumer Welfare? Cournot and Bertrand Competition Under Uncertain Demand

We analyze the welfare effects of horizontal mergers in a model wherein firms produce differentiated products and possess asymmetric information about uncertain market demand. Mergers do not bring about synergies or cost savings, but do allow firms to share their market demand information. We find that under Cournot competition, mergers without synergies could increase expected consumer surplus and social welfare, provided that market volatility is sufficiently large. The parameter spaces in which mergers are beneficial to consumers and society widen when products are more differentiated. In contrast, under Bertrand competition, mergers are always welfare reducing regardless of the degree of market volatility and extent of product differentiation. The driving force for the contrasting results lies in opposing welfare effects of information sharing in the contexts of quantity and price setting.

INSTANTANEOUS INFORMATION ALWAYS STABILIZES?

The impact of information improvement on local stability is examined for continuous dynamics. It is conventionally believed that removal of uncertainty always brings additional stability to an existing equilibrium. This paper shows that the relation between information and equilibrium stability may not be monotonic. Removal of information lag may sometimes destabilize the otherwise stable continuous model. Economic applications to Cournot and Bertrand competition are examined where the role of improved information on stability is shown to be cost-structure specific. Elimination of lags may cause stability loss. The conclusion drawn on two-dimensional continuous dynamics is briefly generalized to multidimensional system.

Relative Firm Profitability and Stock Return Sensitivity to Industry-Level News

ABSTRACT This study provides theory and evidence to demonstrate how relative firm profitability within an industry affects stock return sensitivity to industry-level news. Extending the Cournot and Bertrand competition models, we predict that (1) the returns of less profitable firms in an industry are more sensitive to industry-level news than those of more profitable firms, and that (2) this inverse relation between relative profitability and return sensitivity is more pronounced when there is positive rather than negative industry news, especially in industries with high (versus low) capital intensity. Using industry returns to proxy for industry-level news, we obtain empirical results consistent with these predictions. We further find that the two fundamental factors that contribute to profitability—cost efficiency and market share—each exhibit an effect similar to that of relative profitability in affecting return sensitivity. Our results remain unchanged after controlling for stock price movements attributable to common risk factors and firm-specific accounting information, and they hold over a range of robustness tests.