Price-increasing competition in oligopolies with low-quality, costbased firm entry
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Date
2024
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Abstract
In October 2015, the first public pharmacy opened in Chile, providing lower prices on various drugs. According to Atal et al. (2024), the entry of public pharmacies into local markets led to a price increase by private pharmacies of around 1%. Similar results have been found in other industries. I derive conditions under which this outcome could be observed by developing a model that incorporates both vertical and horizontal differentiation in an oligopolistic market. I found that incumbent high-quality firms can experience a price increase in response to the entry of a lower- quality, cost-based competitor if transportation costs are intermediate or high (i.e. moderate or low degree of competition), under certain sets of parameters. Furthermore, for intermediate values of transportation costs, vertical differentiation is necessary to observe a price increase. Moreover, price-increasing competition is possible under low transportation costs if the incumbent firms perfectly collude. It is also noted that the entry could benefit incumbent firms and harm consumer welfare.
Description
Tesis (Magíster en Economía)--Pontificia Universidad Católica de Chile, 2024
Keywords
Product differentiation, Entry, Oligopoly competition, Price competition