A note on price and quality competition between asymmetric firms

Nobuo Matsubayashi, Yoshiyasu Yamada

Research output: Contribution to journalArticle

27 Citations (Scopus)

Abstract

This paper analyzes the impact of asymmetry between firms on the outcome of price and quality competition from a microeconomic viewpoint. Consumers purchase a product based on not only its price but also its quality level; therefore, two firms compete in determining their prices and quality levels to maximize their profits. The asymmetry arises from the difference in consumers' loyalty to each firm; that asymmetry then determines a character of differentiation between firms. Our purpose is to show how asymmetry influences competition under varying consumers' price- and quality-sensitivity. In doing so, we extend earlier work in the area of price and quality competition. We show that in both the moderately quality-sensitive and price-sensitive markets, higher consumers' sensitivity as well as lower consumers' loyalty to any firm leads to intense competition, resulting in a decrease of both firms' equilibrium profits. On the other hand, in highly quality-sensitive market, asymmetry compels the smaller firm to change its competitive strategy. In general, this is more beneficial to the larger firm, as the smaller firm's profit tends to decline. In the worst case, the smaller firm is driven out of business under equilibrium.

Original languageEnglish
Pages (from-to)571-581
Number of pages11
JournalEuropean Journal of Operational Research
Volume187
Issue number2
DOIs
Publication statusPublished - 2008 Jun 1

Keywords

  • Consumers' loyalty
  • Consumers' sensitivity
  • Economics
  • Non-cooperative game
  • Price and quality competition
  • Vertical and horizontal differentiation

ASJC Scopus subject areas

  • Computer Science(all)
  • Modelling and Simulation
  • Management Science and Operations Research
  • Information Systems and Management

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