In this paper, we compare Bertrand and Cournot equilibria in a differentiated duopoly with linear demand and cost functions. We extend the Singh and Vives (1984) model by allowing for a wider range of cost and demand (product quality) asymmetry between firms. Focusing on the case of substitute goods, we show that both the efficient firm's profits and industry profits are higher under Bertrand competition when asymmetry is strong and/or products are weakly differentiated. Therefore, Singh and Vives's ranking of profits between the two modes of competition is reversed in a sizeable portion of the relevant parameter space. Contrary to the standard result with symmetric firms, we also show that product differentiation can reduce both the efficient firm's and industry profits, implying that a local incentive towards less differentiation may arise.
This article unifies various approaches to the analysis of exclusive dealing that so far have been regarded as distinct. The common element of these approaches is that firms depart from efficient pricing, raising marginal prices above marginal costs. We show that with distorted prices, exclusive dealing can be directly profitable and anticompetitive provided that the dominant firm enjoys a competitive advantage over rivals. The dominant firm gains directly, rather than in the future, or in adjacent markets, thanks to the boost in demand it enjoys when buyers sign exclusive contracts. We discuss the implication of the theory for antitrust policy.
We study the effect of the competitive selection process on the economy's rate of growth. In an extension of standard quality-ladder models of endogenous growth, we allow for the possibility that in each period several asymmetric firms (representing an endogenously determined number of past innovators) may be simultaneously active in an industry. Stronger competitive pressure then has conflicting effects on the incentive to innovate, lowering prices but also selecting the more efficient firms. We show that the market selection effect of competition always increases the incentive to innovate and find circumstances in which it can outweigh the traditional negative effect of lower prices.One of the many reasons why economists praise competition is that it improves the process of output reallocation between producers, selecting the more efficient firms and weeding out the less efficient. This competitive selection process is especially important in growing economies, where productivity changes continuously with technical progress. In the growth literature, most Schumpeterian models of endogenous growth posit competition so intense that only the most productive firm is active in each industry at any time, implying that there is no room for further improvement in the process of market selection. But there is ample empirical evidence of micro-level heterogeneity in productivity across firms, which suggests that in real life competition may not be as intense.If this is so, an increase in competitive pressure can still improve the process of market selection. This is certainly good for static efficiency but what effect does it have on the incentive to innovate and hence the growth rate of the economy? Our thesis is that stronger competitive selection is also good for growth and its positive effect can be great enough to outweigh the traditional negative Schumpeterian effect. Thus, our analysis can help to explain the positive or uncertain relationship between competition and growth found in the empirical literature. 1 To demonstrate our results, we extend standard quality-ladder models of endogenous growth to allow for the possibility that several asymmetric firms (representing an endogenously determined number of successive innovators) can be active in an industry at the same time. In early Schumpeterian models, it is an equilibrium property that the technological leader should be the sole active firm. This follows from the postulate that innovations are drastic, or else firms compete a la Bertrand. 2 Our extension is to assume that innovations are non-drastic and that firms compete a la Cournot. (We also use a conjectural-variations reduced-form model that encompasses * We are grateful to three anonymous referees and Editor Antonio Ciccone for useful comments and suggestions on previous versions of this article. We also benefited from comments by
We investigate the interaction between two terms of payment, supplier credit sales and customer advance payment. We find evidence that advance payments may signal customer creditworthiness and increase trade credit extension when we control for vendor size in international transactions or for the traded goods characteristics.
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