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24 Aug 2015Working Paper Summaries

Multi-Product Duopoly with Cross-Product Cost Interdependencies

Multi-product firms in many industries lack the flexibility to choose different quality tiers for different product lines. Once committed to a certain quality tier, either high or low, in one product line, it is usually more costly to offer another product line in a different quality tier instead of offering it in the same tier. This paper probes the strategic implications of this combination of brand stickiness and operational complexity for duopoly competition.

Author Abstract

Many multi-product firms incur a complexity fixed cost when offering different product lines in different quality tiers relative to the case when offering all products lines in the same quality tier (high or low). Such fixed costs create an interdependency between firms’ choices of quality tiers across different product lines, even when demands are independent. We investigate the effects of this interdependency on equilibrium profits in a Stackelberg duopoly game. Both firms’ profits are (weakly) higher when the complexity cost is infinite than when it is 0. The Stackelberg leader’s profits are always (weakly) higher with a positive complexity fixed cost, but its profits can be non-monotonic in the magnitude of this cost. The Stackelberg follower’s profits can be lower when the complexity fixed cost is positive than when it is equal to 0.

Paper Information

Full Working Paper Text
Working Paper Publication Date: July 2015
HBS Working Paper Number: 16-010
Faculty Unit(s): Strategy

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