Seminar

Product Improvement in a Winner-Take-All Market

Michael Riordan (University of Columbia)

March 19, 2013, 11:00–12:30

Toulouse

Room MS 001

Economic Theory Seminar

Abstract

Mixed and pure equilibria are characterized for a duopoly model of simultaneous quality improvement followed by price competition in a market with limited consumer heterogeneity. In the second stage Bertrand equilibrium, the higher-quality firm captures the entire market, earning a profit proportional to the quality difference. If initial product qualities are not very different, then there are many equilibria of the full game. These equilibria have substantially different expected welfare, and predict a wide range of possible quality outcomes. Furthermore, it is possible to “purify” the mixed equilibria, i.e. multiple pure equilibria with approximately the same outcome distributions exist in nearby extended games of incomplete information. Finally, analogous pure and mixed equilibria exist for nearby dynamic games for which discounting is sufficiently great and quality depreciation sufficiently quick.