A note on price and quality competition between asymmetric firms. (English) Zbl 1149.90052

Matsubayashi, Nobuo; Yamada, Yoshiyasu

Eur. J. Oper. Res. 187, No. 2, 571-581 (2008).

Summary: This paper analyzes the impact of asymmetry between firms on the outcome of price and quality competition from a microeconomic viewpoint. Consumers purchase a product based on not only its price but also its quality level; therefore, two firms compete in determining their prices and quality levels to maximize their profits. The asymmetry arises from the difference in consumers’ loyalty to each firm; that asymmetry then determines a character of differentiation between firms. Our purpose is to show how asymmetry influences competition under varying consumers’ price- and quality-sensitivity. In doing so, we extend earlier work in the area of price and quality competition. We show that in both the moderately quality-sensitive and price-sensitive markets, higher consumers’ sensitivity as well as lower consumers’ loyalty to any firm leads to intense competition, resulting in a decrease of both firms’ equilibrium profits. On the other hand, in highly quality-sensitive market, asymmetry compels the smaller firm to change its competitive strategy. In general, this is more beneficial to the larger firm, as the smaller firm’s profit tends to decline. In the worst case, the smaller firm is driven out of business under equilibrium.

MSC:

90B30

Production models

Keywords:

economics; price and quality competition; consumers’ loyalty; vertical and horizontal differentiation; consumers’ sensitivity; non-cooperative game

References:

[1]	Banker, R. D.; Khosla, I.; Sinha, K. K., Quality and competition, Management Science, 44, 9, 1179-1192 (1998) · Zbl 0989.91538
[2]	Desai, P. S., Quality segmentation in spatial markets: When does cannibalization affect product line design?, Marketing Science, 20, 3, 265-283 (2001)
[3]	Hotelling, H., Stability in competition, Economic Journal, 39, 41-57 (1929)
[4]	Kim, K.; Chhajed, D., Product design with multiple quality-type attributes, Management Science, 48, 11, 1502-1511 (2002)
[5]	Matsubayashi, N., Price and quality competition: The effect of differentiation and vertical integration, European Journal of Operational Research, 180, 2, 907-921 (2007) · Zbl 1123.90015
[9]	Oz, Shy., Industrial Organization: Theory and Applications (1995), The MIT Press: The MIT Press Cambridge
[10]	Shaffer, G.; Zhang, Z. J., Competitive one-to-one promotion, Management Science, 48, 9, 1143-1160 (2002) · Zbl 1232.90243
[11]	Syam, N. B.; Ranran, R.; James, D. H., Customized products: A competitive analysis, Marketing Science, 24, 4, 569-584 (2005)
[12]	Tyagi, R. K., Sequential product positioning under differential costs, Management Science, 46, 7, 928-940 (2000) · Zbl 1231.91132