Differentiated Duopoly with Asymmetric Costs

17 Pages Posted: 26 Oct 2006

Abstract

In this paper, we compare Bertrand and Cournot equilibria in a differentiated duopoly with linear demand and cost functions. We extend the Singh and Vives (1984) model by allowing for a wider range of cost and demand (product quality) asymmetry between firms. Focusing on the case of substitute goods, we show that both the efficient firm's profits and industry profits are higher under Bertrand competition when asymmetry is strong and/or products are weakly differentiated. Therefore, Singh and Vives's ranking of profits between the two modes of competition is reversed in a sizeable portion of the relevant parameter space. Contrary to the standard result with symmetric firms, we also show that product differentiation can reduce both the efficient firm's and industry profits, implying that a local incentive towards less differentiation may arise.

Suggested Citation

Zanchettin, Piercarlo, Differentiated Duopoly with Asymmetric Costs. Journal of Economics & Management Strategy, Vol. 15, No. 4, pp. 999-1015, Winter 2006, Available at SSRN: https://ssrn.com/abstract=940141 or http://dx.doi.org/10.1111/j.1530-9134.2006.00125.x

Piercarlo Zanchettin (Contact Author)

University of Leicester ( email )

Department of Economics
Leicester, LE1 7RH
United Kingdom

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