Asymmetric complementary goods pricing under sequential moves

Research output: Journal PublicationsJournal Article (refereed)Researchpeer-review

Abstract

We examine asymmetric complementary good pricing under sequential moves when a price leader (firm A) produces a main product, whereas a price follower (firm B) produces an enhancer for the main product. We show that under sequential moves there is an additional pricing regime “pseudo complements" besides the two cases obtained under simultaneous pricing, namely, (i) “independent pricing" and (ii) “bundling pricing." Under the pseudo complements regime, firm A behaves as if it is an independent monopolist, whereas firm B behaves as if the two products are strict complements. We characterize several properties of the pseudo complements regime. We show that the double mark-up problem persists in the pseudo complement regime. However, when firm A incorporates firm B's function into product A, it alleviates the double mark-up problem. We also explore how the main product's quality improvement affects the follower's RandD incentives.
Original languageEnglish
JournalThe B.E. Journal of Economic Analysis and Policy
Volume10
Issue number1
DOIs
Publication statusPublished - 1 May 2010
Externally publishedYes

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Complementary goods
Pricing
Follower
Markup
RandD
Incentives
Monopolist
Product quality
Quality improvement
Bundling

Cite this

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title = "Asymmetric complementary goods pricing under sequential moves",
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Asymmetric complementary goods pricing under sequential moves. / CHENG, Kwok Hon, Leonard; NAHM, Jae.

In: The B.E. Journal of Economic Analysis and Policy, Vol. 10, No. 1, 01.05.2010.

Research output: Journal PublicationsJournal Article (refereed)Researchpeer-review

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AB - We examine asymmetric complementary good pricing under sequential moves when a price leader (firm A) produces a main product, whereas a price follower (firm B) produces an enhancer for the main product. We show that under sequential moves there is an additional pricing regime “pseudo complements" besides the two cases obtained under simultaneous pricing, namely, (i) “independent pricing" and (ii) “bundling pricing." Under the pseudo complements regime, firm A behaves as if it is an independent monopolist, whereas firm B behaves as if the two products are strict complements. We characterize several properties of the pseudo complements regime. We show that the double mark-up problem persists in the pseudo complement regime. However, when firm A incorporates firm B's function into product A, it alleviates the double mark-up problem. We also explore how the main product's quality improvement affects the follower's RandD incentives.

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