Dynamic retail price and investment competition

Kyle Bagwell, Garey Ramey, Daniel F. Spulber

Research output: Contribution to journalArticle

19 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)207-227
Number of pages21
JournalRAND Journal of Economics
Volume28
Issue number2
DOIs
StatePublished - Jan 1 1997

ASJC Scopus subject areas

  • Economics and Econometrics

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