Price and quality competition: The effect of differentiation and vertical integration

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68 Citations (Scopus)

Abstract

This paper studies an instance of price and quality competition between firms as seen in the recent Internet market. 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. Characterizing this competition from a microeconomic viewpoint, we consider two possible business strategies that firms can utilize to overcome the competition-the differentiation and the vertical integration with another complementary firm. We show an interesting result not seen in the well-known Bertrand price competition: not only does the differentiation always increase the firms' profits, but also it can increase the consumer's welfare in a quality-sensitive market. We further derive that under some mild conditions the monopolistic vertical integration that excludes the combination-purchase with a competitor's product is beneficial for both the integrated firm and its consumers.

Original languageEnglish
Pages (from-to)907-921
Number of pages15
JournalEuropean Journal of Operational Research
Volume180
Issue number2
DOIs
Publication statusPublished - 2007 Jul 16

Keywords

  • Broadband internet market
  • Economics
  • Non-cooperative game
  • Product differentiation
  • Vertical integration

ASJC Scopus subject areas

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

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