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Economic Theory
Publisher: Springer-Verlag GmbH
ISSN: 0938-2259 (Paper) 1432-0479 (Online)
Issue: Volume 17, Number 3
Date:  May 2001
Pages: 693 - 700
Profitability of price and quantity strategies in a duopoly with vertical product differentiation

Yasuhito Tanaka A1

A1 Faculty of Law, Chuo University, 742-1, Higashinakano, Hachioji, Tokyo, 192-0393, JAPAN (e-mail: yasuhito@tamacc.chuo-u.ac.jp)


Abstract. Using a model according to Mussa and Rosen (1978) and Bonanno and Haworth (1998) we consider a sub-game perfect equilibrium of a two-stage game in a duopolistic industry in which the products of the firms are vertically differentiated. In the industry, there are a high quality firm and a low quality firm. In the first stage of the game, the firms choose their strategic variables, price or quantity. In the second stage, they determine the levels of their strategic variables. We will show that, under an assumption about distribution of consumers' preference, we obtain the result that is similar to Singh and Vives (1984)' proposition (their Proposition 3) in the case of substitutes with nonlinear demand functions. That is, in the first stage of the game, a quantity strategy dominates a price strategy for both firms.


Keywords and Phrases: Price and quantity strategies, Duopoly, Vertical product differentiation.

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