Online: Differentiated Durable Goods Competition: Stationarity and Market Power
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Micro Theory Seminar
Online: Zoom
United States
Abstract: The paper establishes why entry of a competitor can increase the profit of an incumbent when the products sold are differentiated durable goods. The results are apply to stationary equilibria and do not rely on collusive strategies discussed in the seminal work by Gul in 1987. Instead, the result establish that the presence of a competitor may reduce the undercutting motive of an incumbent when products are suitably differentiated. Limiting profits and time to clear the market are characterized for such environments. As in monopoly setting, durability weakly decreases the profit of the seller but to a lesser extent. These insights are then applied in a Hotelling spatial competition model where the choice of products is endogenous to show that durability can reduce product differentiation and increase efficiency to some extent.
*Joint with Pasquale Schiraldi (LSE)
