Multiproduct Oligopoly and Bertrand Supertraps

34 Pages Posted: 31 Oct 2008

See all articles by Luis M. B. Cabral

Luis M. B. Cabral

New York University (NYU) - Leonard N. Stern School of Business - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: January 2001

Abstract

We study oligopoly price competition between multiproduct firms, firms whose productsinteract in the pro¯t function. Specifically, we focus on the impact of intra firm product interactions on the level of equilibrium prices and pro¯ts. This impact is divided into two effects: a direct effect and a strategic effect (i.e., through the competitors' actions). We derive conditionssuch that, if intra-firm product interactions cause prices to decrease (increase) while holding competitors' prices fixed, then the strategic effect hurts (benefits) the ¯rm. We also show that, under reasonable general assumptions, the strategic effect more than outweighs the direct effect, so that equilibrium pro¯ts vary in the direction opposite of the direct effect (Bertrandsupertrap). Several instances of Bertrand supertraps are developed. For example, stronger demand complementarity or economies of scope lead to tougher price competition to an extent that may decrease profitability (even when the direct profit effect is positive). We present a number of applications of the general results, including learning curves, network effects, systems competition, bundling, switching costs, and internet cross-referencing.

Keywords: Competition, strategic complementarity, profit complementarity, profitability, economies of scope, learning curves, core competencies, network e®ects, switching costs, the Internet

Suggested Citation

Cabral, Luis M. B., Multiproduct Oligopoly and Bertrand Supertraps (January 2001). NYU Working Paper No. EC-01-04. Available at SSRN: https://ssrn.com/abstract=1292669

Luis M. B. Cabral (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States
212-998-0858 (Phone)
212-998-4218 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~lcabral

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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