Dynamic Retail Price and Investment Competition

RAND JOURNAL OF ECONOMICS, Vol. 28, No. 2

Posted: 11 Jun 1997

See all articles by Kyle Bagwell

Kyle Bagwell

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Garey Ramey

University of California, San Diego (UCSD) - Department of Economics

Daniel F. Spulber

Northwestern University - Kellogg School of Management

Abstract

We develop a model of retail competition in which retailers select prices and investments in cost reduction. An equilibrium is constructed in which several identical firms enter and then engage in a phase of vigorous price competition. This phase is concluded with a "shakeout," as a low-price, low-cost firm comes to dominate the market. A central feature of the equilibrium is that low prices are complementary with large investments in cost reduction. Even though the dominant firm's price rises through time, and initially may be below marginal cost, we argue that an interpretation of predatory pricing may be inappropriate.

JEL Classification: L11, L81

Suggested Citation

Bagwell, Kyle and Ramey, Garey and Spulber, Daniel F., Dynamic Retail Price and Investment Competition. RAND JOURNAL OF ECONOMICS, Vol. 28, No. 2, Available at SSRN: https://ssrn.com/abstract=8677

Kyle Bagwell (Contact Author)

Stanford University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Garey Ramey

University of California, San Diego (UCSD) - Department of Economics ( email )

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Daniel F. Spulber

Northwestern University - Kellogg School of Management ( email )

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847-467-1777 (Fax)

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