Product boundary, vertical competition, and the double mark-up problem

Research output: Journal PublicationsJournal Article (refereed)

10 Citations (Scopus)

Abstract

We develop a model in which a main product (called product A) provides a performance quality z by itself, whereas a complementary product (called product B) is useless by itself but enhances the main product's performance quality to q > z. This asymmetric complementarity gives rise to the following results. First, if z is relatively small, then firms A and B behave as if the products are symmetrically complementary with the usual double marginalization problem. Second, if z is sufficiently large, then firms A and B price their products as if they are independent. Third, over a certain range of intermediate z, no pure-strategy Nash equilibrium exists.
Original languageEnglish
Pages (from-to)447-466
Number of pages20
JournalThe RAND Journal of Economics
Volume38
Issue number2
DOIs
Publication statusPublished - 1 Jun 2007
Externally publishedYes

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Markup
Double marginalization
Complementary products
Pure strategy Nash equilibrium
Large firms
Small firms
Complementarity

Cite this

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title = "Product boundary, vertical competition, and the double mark-up problem",
abstract = "We develop a model in which a main product (called product A) provides a performance quality z by itself, whereas a complementary product (called product B) is useless by itself but enhances the main product's performance quality to q > z. This asymmetric complementarity gives rise to the following results. First, if z is relatively small, then firms A and B behave as if the products are symmetrically complementary with the usual double marginalization problem. Second, if z is sufficiently large, then firms A and B price their products as if they are independent. Third, over a certain range of intermediate z, no pure-strategy Nash equilibrium exists.",
author = "CHENG, {Kwok Hon, Leonard} and Jae NAHM",
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Product boundary, vertical competition, and the double mark-up problem. / CHENG, Kwok Hon, Leonard; NAHM, Jae.

In: The RAND Journal of Economics, Vol. 38, No. 2, 01.06.2007, p. 447-466.

Research output: Journal PublicationsJournal Article (refereed)

TY - JOUR

T1 - Product boundary, vertical competition, and the double mark-up problem

AU - CHENG, Kwok Hon, Leonard

AU - NAHM, Jae

PY - 2007/6/1

Y1 - 2007/6/1

N2 - We develop a model in which a main product (called product A) provides a performance quality z by itself, whereas a complementary product (called product B) is useless by itself but enhances the main product's performance quality to q > z. This asymmetric complementarity gives rise to the following results. First, if z is relatively small, then firms A and B behave as if the products are symmetrically complementary with the usual double marginalization problem. Second, if z is sufficiently large, then firms A and B price their products as if they are independent. Third, over a certain range of intermediate z, no pure-strategy Nash equilibrium exists.

AB - We develop a model in which a main product (called product A) provides a performance quality z by itself, whereas a complementary product (called product B) is useless by itself but enhances the main product's performance quality to q > z. This asymmetric complementarity gives rise to the following results. First, if z is relatively small, then firms A and B behave as if the products are symmetrically complementary with the usual double marginalization problem. Second, if z is sufficiently large, then firms A and B price their products as if they are independent. Third, over a certain range of intermediate z, no pure-strategy Nash equilibrium exists.

UR - http://commons.ln.edu.hk/sw_master/1515

U2 - 10.1111/j.1756-2171.2007.tb00077.x

DO - 10.1111/j.1756-2171.2007.tb00077.x

M3 - Journal Article (refereed)

VL - 38

SP - 447

EP - 466

JO - RAND Journal of Economics

JF - RAND Journal of Economics

SN - 0741-6261

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