Thursday, November 22, 2018

Specialization, Generic Firms and Market Competition

Mark Lijesen, VU University Amsterdam and Carlo Reggiani, University of Manchester examine Specialization, Generic Firms and Market Competition.

ABSTRACT: The choice of specialization affects firms' brand perception by consumers and it is of crucial importance for their profitability in competitive markets. We model how firms choose their level of specialization using the "spokes model". The model naturally captures local sub-markets where some brands are not available. We provide results on pricing and characterize the optimal specialization choice in duopoly and triopoly. Optimal specialization depends on: (i) the number of firms/brands, (ii) the number of firms/brands that have not entered a local market and (iii) the characteristics of the demand faced by firms. The model predicts the co-existence of generic and specialized firms, a feature common to many markets but very rare in modeling endogenous product differentiation.

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