Issue: Summer 1997
Pages: pp. 207-227
Authors: Kyle Bagwell, Garey Ramey, and Daniel F. Spulber
Title: Dynamic Retail Price and Investment Competition
Abstract: We develop a model of retail competition in which retailers select prices and investments in cost reduction. An equilibrium is constructed in which several identical firms enter and then engage in a phase of vigorous price competition. This phase is concluded with a "shakeout," as a low-price, low-cost firm comes to dominate the market. A central feature of the equilibrium is that low prices are complementary with large investments in cost reduction. Even though the dominant firm's price rises through time, and initially may be below marginal cost, we argue that an interpretation of predatory pricing may be inappropriate.
Retail and Wholesale Trade (L810)
Market Structure, Firm Strategy, and Market Performance: Oligopoly and
Other Imperfect Markets; monopolistic competition; contestable markets
(L130)
Industry Studies--Distributive Trades--Retail Trade (6333)
Industry Studies--Distributive Trades--Wholesale Trade (6332)
Market
Structure: Industrial Organization and Corporate Strategy (6110)
Microeconomics--Theory of Firm and Industry under Imperfectly
Competitive Market Structures (0226)