Monday, September 30, 2019

Endogenous vertical segmentation in a Cournot oligopoly

By: BELLEFLAMME Paul, (CORE, UCLouvain); FORLIN Valeria, (CORE, UCLouvain and European Commission, DG Clima)
Abstract: An arbitrary number of (ex ante symmetric) firms first choose whether to produce a high-quality or a low-quality product and then the quantity of product to put on the market. We establish the following results: (i) there exists competition within and across quality segments; (ii) firms may be better off producing the low quality if competition within this segment is sufficiently low; (iii) a firm's switch across qualities may benefit all the other firms; (iv) there exists a unique partition of the firms between the two quality segments; (v) if high quality has a larger cost-quality ratio, then the equilibrium exhibits vertical differentiation; (vi) there may be too much differentiation from the consumers' point of view.

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