Wednesday, May 15, 2013
The Economics of Cannibalization: A Duopoly in which Firms Supply Two Vertically Differentiated Products
Posted by D. Daniel Sokol
Ryoma Kitamura (Graduate School of Economics, Kwansei Gakuin University) and Tetsuya Shinkai (School of Economics, Kwansei Gakuin University) explain The Economics of Cannibalization: A Duopoly in which Firms Supply Two Vertically Differentiated Products.
ABSTRACT: In this paper, we consider and propose a new duopoly model of cannibalization in which firms produce and sell two vertically differentiated products in the same market. We show that each firm produces the high-quality good more (less) than the low-quality good if the upper limit of taste of consumers is sufficiently high(not so high). Further, we find that the increase in the difference in quality between two goods leads to cannibalization, such that the high-quality goods keep out the low-quality goods from the market. Furthermore, we conduct a welfare analysis.