Download this Paper Open PDF in Browser

On the Effects of Selective Below-Cost Pricing in a Vertical Differentiation Model

15 Pages Posted: 18 Dec 2010  

Pu Chen

Bielefeld University - Department of Business Administration and Economics

Date Written: 2009

Abstract

We analyse the effects of predation in a vertical differentiation model, where the highquality 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.

Keywords: Vertical differentiation, selective below-cost pricing, predation, price discrimination

Suggested Citation

Chen, Pu, On the Effects of Selective Below-Cost Pricing in a Vertical Differentiation Model (2009). Economics Discussion Paper No. 2009-25. Available at SSRN: https://ssrn.com/abstract=1726725 or http://dx.doi.org/10.2139/ssrn.1726725

Pu Chen (Contact Author)

Bielefeld University - Department of Business Administration and Economics ( email )

P.O. Box 100131
D-33501 Bielefeld, NRW 33501
Germany

Paper statistics

Downloads
27
Abstract Views
197