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Title:On the effects of selective below-cost pricing in a vertical differentiation model PDF Logo
Authors:Colombo, Stefano
Issue Date:2009
Citation:[Journal:] Economics: The Open-Access, Open-Assessment E-Journal [Volume:] 3 [Issue:] 2009-33 [Pages:] 1-13 [DOI/URN:] doi:10.5018/economics-ejournal.ja.2009-33
Abstract:We analyse the effects of predation in a vertical differentiation model, where the high-quality incumbent is able to price discriminate while the low-quality entrant sets a uniform price. The incumbent may act as a predator, that is, it may price below its marginal costs on a subset of consumers to induce the rival's exit. We show that the entrant may adopt an aggressive attitude to make predation unprofitable for the incumbent. In this case predation does not occur and the equilibrium prices are lower than the equilibrium prices which would emerge in a contest of explicitly forbidden predation. Moreover, we show that when the incumbent may choose whether to price discriminate or not before the game starts, if the quality cost function is sufficiently convex, there always exists a parameter space on which the incumbent prefers to commit not to price discriminate.
Subjects:Vertical differentiation
selective below-cost pricing
predation
price discrimination
JEL:D43
L12
L41
Persistent Identifier of the first edition:doi:10.5018/economics-ejournal.ja.2009-33
Creative Commons License:http://creativecommons.org/licenses/by-nc/2.0/de/deed.en
Document Type:Article
Appears in Collections:Economics: The Open-Access, Open-Assessment E-Journal - Journal Articles

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