Corporate cannibalism in an oligopolistic market

Abstract

In this paper, we consider whether a firm that produces high‐quality products chooses to produce lower‐quality products. We find that when there is only one monopoly in the market, the monopoly will only produce a single‐quality product. When there are two firms in the market, one produces high‐quality products and the other one produces low‐quality products. When certain conditions are met, the firm that produces high‐quality products has an incentive to produce products of medium or lower quality, thus profiting. The production of new products by a firm will bring about the improvement of consumer surplus and social welfare.

Vertical shareholding, vertical product differentiation and social welfare

“…Without loss of generality, we assume that $${D}_{1}$$ produces a lower quality product than $${D}_{2}$$, and the product quality of firm 1 is $${\theta }_{1}=1$$ and the product quality of firm 2 is $${\theta }_{2}=1+\delta $$, where $$\delta \in (0,1)$$ represents the difference in product quality. Same as Wang and Wang (2021b, 2022), the consumers are uniformly distributed on a unit line, $$l\in [0,1]$$. The utility function of the consumer located at $$x\in l$$ is $$u\left(x,{\theta }_{i},{p}_{i}\right)=x{\theta }_{i}-{p}_{i}$$, where $${p}_{i}$$ is the price of the final product which is produced by $${D}_{i}$$.…”