Multi-Product Duopoly with Cross-Product Cost Interdependencies

20 Pages Posted: 23 Jul 2015

See all articles by Gary Biglaiser

Gary Biglaiser

University of North Carolina

Andrei Hagiu

Boston University - Questrom School of Business

Date Written: July 21, 2015

Abstract

Many multi-product firms incur a complexity fixed cost when offering different product lines in different quality tiers relative to the case when offering all products lines in the same quality tier (high or low). Such fixed costs create an interdependency between firms’ choices of quality tiers across different product lines, even when demands are independent. We investigate the effects of this interdependency on equilibrium profits in a Stackelberg duopoly game. Both firms’ profits are (weakly) higher when the complexity cost is infinite than when it is 0. The Stackelberg leader’s profits are always (weakly) higher with a positive complexity fixed cost, but its profits can be non-monotonic in the magnitude of this cost. The Stackelberg follower’s profits can be lower when the complexity fixed cost is positive than when it is equal to 0.

Keywords: multi-product duopoly, vertical differentiation, fixed costs.

JEL Classification: L1, L2, L8

Suggested Citation

Biglaiser, Gary and Hagiu, Andrei, Multi-Product Duopoly with Cross-Product Cost Interdependencies (July 21, 2015). Harvard Business School Strategy Unit Working Paper No. 16-010, Available at SSRN: https://ssrn.com/abstract=2634175 or http://dx.doi.org/10.2139/ssrn.2634175

Gary Biglaiser

University of North Carolina ( email )

Chapel Hill, NC 27599
United States
919-966-4884 (Phone)
919-966-4986 (Fax)

Andrei Hagiu (Contact Author)

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States

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