Abstract
This paper identifies the environments in which it does not pay for a multiproduct firm to engage in small cost reductions. Specifically, it shows that a multiproduct Bertrand firm’s profits will decrease in response to a small reduction in one product’s marginal cost if and only if the output share of the cost-reducing unit is below a threshold. Because cost reductions by a single-product firm or by a multiproduct Cournot firm always increase the firm’s profits, this result is unique to multiproduct Bertrand firms.
Article PDF
Similar content being viewed by others
Avoid common mistakes on your manuscript.
References
Bertrand J (1883) Review of “Théorie mathématique de la richesse sociale” and “Recherches sur les principes mathématiques de la théorie des richesses.” Journal des Savants (Paris):499–508
Bulow J, Geanakoplos J, Klemperer P (1985) Multiproduct oligopoly: strategic substitutes and complements. J Polit Econ 93: 488–511
Cabral L, Villas-Boas J (2005) Bertrand supertraps. Manag Sci 51: 599–613
Deneckere R, Davidson C (1985) Incentives to form coalitions with Bertrand competition. Rand J Econ 16: 473–486
Dixit A (1986) Comparative statics for oligopoly. Int Econ Rev 27: 107–122
Février P, Linnemer L (2004) Idiosyncratic shocks in an asymmetric Cournot oligopoly. Int J Indus Organ 22: 835–848
Kao T, Menezes F (2009) Endogenous mergers under multi-market competition. J Math Econ 45: 817–829
Lapan H, Hennessy D (2006) A note on cost arrangement and market performance in a multi-product Cournot oligopoly. Int J Indus Organ 24: 583–591
Lapan H, Hennessy D (2007) Statistical moments analysis of production and welfare in multi-product Cournot oligopoly. Int J Indus Organ 26: 598–606
Nakayama Y (2009) The impact of e-commerce: it always benefits consumers but may reduce social welfare. Jpn World Econ 21: 239–247
Pham Do K, Folmer H (2003) International fishery agreements: the feasibility and impacts of partial cooperation. CentER Discussion Paper No. 2003–52. Tilburg University
Shapiro C (1989) Theories of oligopoly behavior. In: Schmalensee R, Willig R (eds), chapter 6 in Handbook of industrial organization, vol 1, pp 329–414
Shubik M (1980) Market structure and behavior. Harvard University Press, Cambridge
Wang X, Zhao J (2007) Welfare reductions from small cost reductions in differentiated oligopoly. Int J Indus Organ 25: 173–185
Zhao J (2001) A characterization for the negative effects of cost reduction in Cournot oligopoly. Int J Indus Organ 19: 455–469
Zhao J, Howe E (2004) Inverse matrices and merger incentives from Bertrand competition, Working Paper. Department of Economics, University of Saskatchewan
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Wang, X.H., Zhao, J. Why are firms sometimes unwilling to reduce costs?. J Econ 101, 103–124 (2010). https://doi.org/10.1007/s00712-010-0148-x
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s00712-010-0148-x