duopoly competition case study

• DOI: 10.1016/J.RTBM.2020.100529
• Corpus ID: 225007811

Competition for rail transport services in duopoly market: Case study of China Railway(CR) Express in Chengdu and Chongqing

• Yitong Ma , Daniel Johnson , +1 author Xianliang Shi
• Published 30 September 2020
• Economics, Engineering, Business, Geography
• Research in transportation business and management

14 Citations

Modeling government subsidy strategies for railway carriers: environmental impacts and industry competition, impact of china railway express on regional resource mismatch—empirical evidence from china, new canal construction and marine emissions strategy: a case of pinglu, comparative analysis of long-distance transportation with the example of sea and rail transport, isolated territories and infrastructure development: a case for land transportation investment in madagascar, roads or railways a case study of madagascar, how would co-opetition with dry ports affect seaports’ adaptation to disasters, unintended environmental gains: the impact of china-europe railway express on carbon dioxide emissions in china, toward a positive compensation policy for rail transport via mechanism design: the case of china railway express, time is money: impact of china-europe railway express on the export of laptop products from chongqing to europe, 29 references, a study on the government subsidies for cr express based on dynamic games of incomplete information, hinterland patterns of china railway (cr) express in china under the belt and road initiative: a preliminary analysis, impact of rail transport services on port competition based on a spatial duopoly model, on service network improvement for shipping lines under the one belt one road initiative of china, evaluation of consolidation center cargo capacity and loctions for china railway express, development of port service network in obor via capacity sharing: an idea from zhejiang province in china, serial and parallel duopoly competition in multi-segment transportation routes, a game theoretical approach to competition between multi-user terminals: the impact of dedicated terminals, the impact on port competition of the integration of port and inland transport services, impact of the carat canal on the evolution of hub ports under china’s belt and road initiative, related papers.

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Competition for rail transport services in duopoly market: Case study of China Railway(CR) Express in Chengdu and Chongqing

Known as the Belt and Road Initiative, China Railway(CR) Express is driving China's efforts to boost connectivity and explore regional cooperation with Eurasian markets. In order to investigate the fierce hinterland competition between two neighbouring CR Express lines, this paper first formulates a non-cooperative game model to explore strategic decisions on pricing accounting for competition in a spatial setting, given frequency, government subsidy, local road infrastructure investment, and operation costs. The authors then extend the model to analyze decisions on frequency and pricing together, and the implications for social welfare, profits and market share as well. Based on a case study of CR Express lines originating from Chengdu and Chongqing to Hamburg, the authors verify their model and conclude some findings. The results show that government subsidy is the major factor that influences operators pricing strategy. Also, frequency and local road infrastructure investment have effects on operators' decisions. For the government, giving more freedom to operators, that is letting operators decide their frequency, is a good way to bring benefits for both social welfare and operator profits.

• Record URL: https://doi.org/10.1016/j.rtbm.2020.100529
• Record URL: http://www.sciencedirect.com/science/article/pii/S2210539519303931
• Find a library where document is available. Order URL: http://worldcat.org/issn/22105395
• © 2020 Elsevier Ltd. All rights reserved. Abstract reprinted with permission of Elsevier.
• Johnson, Daniel
• Wang, Judith Y T
• Shi, Xianliang
• Publication Date: 2021-3
• Media Type: Web
• Features: Figures; Maps; References; Tables;
• Research in Transportation Business & Management
• Issue Number: 0
• Publisher: Elsevier
• ISSN: 2210-5395
• Serial URL: http://www.sciencedirect.com/science/journal/22105395

Subject/Index Terms

• TRT Terms: Business practices ; Case studies ; Competition ; Railroad transportation
• Identifier Terms: China Railway Express Company
• Geographic Terms: Chengdu (China) ; Chongqing (China)
• Subject Areas: Administration and Management; Railroads;

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• Accession Number: 01756044
• Record Type: Publication
• Files: TRIS
• Created Date: Oct 27 2020 12:25PM

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Price and Quantity Competition in a Differentiated Duopoly

1984, Rand Journal of Economics

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Price Competition in a Vertizontally Differentiated Duopoly

• Open access
• Published: 03 February 2023
• Volume 62 , pages 219–239, ( 2023 )

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• Iwan Bos 1 &
• Ronald Peeters 2  

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This paper develops a price competition duopoly model in which products are both horizontally and vertically differentiated. Firms each offer a standard and a premium product to buyers—some of whom are brand loyal. We establish the existence of a unique and symmetric competitive pricing equilibrium. Equilibrium prices are increasing in the degree of horizontal differentiation and the number of brand-loyal customers. The equilibrium price of the standard (premium) good is decreasing (increasing) in the quality difference and profits can increase in costs when this difference is large enough. If the pricing decision is taken at the product (division) level, then there is again a unique (and symmetric) competitive pricing equilibrium. Equilibrium prices and profits are lower than in the centralized case and demand for the standard product is higher when the quality difference is sufficiently large. Welfare is unambiguously lower with decentralized pricing.

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1 Introduction

In the period mid 2017 until mid 2018, U.S. citizens spent over $5 billion on dry dog food. Footnote 1 The table below lists the four leading dry dog food brands in the period mid 2017 until mid 2018. Footnote 2 These four brands are produced by the two major firms in the dog food market: Nestlé (39% market share) and Mars (24% market share). The last column of the table presents the price per pound at Walmart for a large-sized bag. Footnote 3 Notice that both manufacturers offer a ‘standard’ and a ‘premium’ brand and that segment prices are (approximately) the same.

There are many industries that consist of a few firms that compete in multiple market segments that are characterized by product quality. Footnote 4 A critical feature of such quality-segmented markets is that competition has both a horizontal and a vertical dimension. For instance, if a firm raises the price of its premium product, then it is likely to ‘lose’ customers to rival brands as well as to its own lower quality division(s). Likewise, if a firm cuts its premium product price, then ceteris paribus it steals customers from comparable quality competitors while cannibalizing the sales of its other items. The fact that multi-product firms are partly in competition with themselves makes the design of an optimal pricing policy far from trivial.

The purpose of this paper is to study strategic pricing by sellers that are competing ‘head-to-head’ in several quality segments simultaneously. Toward that end, we develop a price-setting duopoly model of vertizontal product differentiation in which firms offer both a standard and a premium product. Demand for these product types comes from two different sorts of customers: those who are brand-anchored; and those who are quality-anchored. Brand-anchored buyers choose only between the standard and premium product of their preferred supplier; by contrast, quality-anchored buyers have a preference for a particular quality level and choose between brands only. Footnote 5 The model contains no less than nine distinct demand- and supply-side parameters, which enables us to study separately the impact of these ‘horizontal’ and ‘vertical’ forces on firms’ pricing decisions.

To summarize some of our main findings: We establish the existence of a unique (and symmetric) competitive pricing equilibrium and perform a series of comparative statics exercises on this equilibrium outcome. With regard to the ‘horizontal forces’, we find that equilibrium prices are increasing in the extent of brand differentiation and decreasing in the number of quality-anchored buyers. With regard to the ‘vertical forces’, we establish that equilibrium prices are increasing in the number of brand-anchored buyers and show that the price of the standard (premium) product is decreasing (increasing) in the quality difference. Interestingly, we find that equilibrium profits may rise when there is a segment-wide increase in production costs.

We then use these results as a basis of comparison to explore the effect of decentralized pricing. If pricing decisions are taken at the product (division) level, then there is again a unique (and symmetric) competitive pricing equilibrium. The equilibrium outcome is such that both prices and profits are lower than in the centralized case. If the quality difference between the standard and premium product is substantial and the costs of producing additional quality are sufficiently small, then a switch from centralized to decentralized pricing leads to an increase of the standard good’s sales. By contrast, the premium product’s market share increases when the quality difference is limited and the marginal costs of producing extra quality are high enough. Last, we find that societal welfare is unambiguously lower with decentralized pricing.

The next section provides a brief literature review. Section  3 introduces the vertizontal differentiation model. The symmetric version of this model is analyzed in Sect.  4 . Sections  5 and 6 consider the impact of asymmetry in consumer preferences, unit costs and organizational structure. Section  7 concludes. All proofs are relegated to the Appendix.

2 Literature Review

This research is at the intersection of three strands of literature: First, it is naturally related to other works that consider vertizontal product differentiation. Vertizontal differentiation models have been employed to study a variety of economic questions: Di Comite et al. ( 2014 ), for instance, introduces a quadratic representative consumer model with vertizontal preferences to assess empirically firm performance in export markets. Building on Neven and Thisse ( 1990 ); Ribeiro ( 2015 ) analyzes price competition between two platforms ( e.g. , media outlets, clubs) that are vertizontally differentiated. Li and Peeters ( 2017 ) examine a vertizontal differentiation setting to study strategic quality information disclosure. None of this research considers multi-product competition, however.

Second, our work contributes to the growing literature on strategic firm behavior in multi-product oligopolies. Nocke and Schutz ( 2018 ) provides a framework to study multi-product pricing when these goods are horizontally differentiated. With regard to quality differentiation, Champsaur and Rochet ( 1989 ) examines what range of qualities profit-maximizing duopolists prefer to offer. More recently, Jing and Zhang ( 2011 ) and Johnson and Myatt ( 2003 , 2006 , 2015 ) also study competition among firms that sell multiple quality-differentiated products to address questions that are related to price promotions, entry, and product-line configurations. These works consider heterogeneity either in taste or in quality—but not both.

Perhaps closest to our work are Gilbert and Matutes ( 1993 ) and Desai ( 2001 ); both articles analyze strategic product line choices by multi-product firms in a vertizontally differentiated spatial setting. A key difference for our model is the presence of brand-loyal customers. Furthermore, our focus is on strategic pricing with vertizontal product differentiation and on how this pricing is affected by demand and supply side factors, such as consumer preferences, degree of differentiation, and production costs.

Third, and last, our analysis sheds light on the potential impact of delegating pricing authority. Stephenson et al. ( 1979 ), for example, use a sample of medical supplies and equipment sellers to compare central pricing authority with delegated pricing authority to the sales force. Among other things, they establish that gross margins and return on assets are lower with decentralized pricing. As argued by Lal ( 1986 ), however, delegating pricing responsibility to salespersons can be profitable when they have superior information about the selling environment. Frenzen et al. ( 2010 ) provide some empirical support for this. They establish a positive relation between pricing authority delegation and firm performance and this effect is strengthened in the presence of information asymmetry and market-related uncertainty.

More generally, there is an extensive literature that addresses the question of who should be granted pricing authority within an organization. Major contributions include Moorthy ( 1988 ), Bhardwaj ( 2001 ), Joseph ( 2001 ), McGuire and Staelin ( 2008 ), and Homburg et al. ( 2012 ), amongst many others. This literature presents conditions under which (de-)centralized pricing is optimal from a company’s perspective.

We compare the situation where price decisions are taken at the firm level (centralized pricing) with the situation where price decisions are taken at the product-quality-type level (decentralized pricing). Within our vertizontal differentiation setting, prices and profits are higher under centralized pricing. A main difference with the existing literature on the locus of pricing authority is that we consider the impact of (de-)centralized pricing on the demand for quality and welfare.

3 A Model of Vertizontal Product Differentiation

Consider a simultaneous-move price-setting duopoly with a low- (standard) and a high- (premium) quality market segment. Along the lines of Hotelling ( 1929 ), let both of these submarkets be represented by a unit interval. Quality is homogeneous within each segment and is indicated by the quality indices \(\beta >0\) and \(\beta +\delta >0\) for the standard and the premium product, respectively. The additional (perceived) quality of the premium product is therefore given by \(\delta >0\) . Products are positioned at the extremes of their respective segment and, without loss of generality, we assume that firm 1 is located at ‘0’ and firm 2 is located at ‘1’.

Firms’ cost structures are identical, and the low- and the high-quality varieties are respectively produced at constant marginal costs \(c_{\ell }\) and \(c_h\) , with \(c_h>c_{\ell }\ge 0\) . It is further assumed that \(\delta >c_h-c_{\ell }\) : The difference in product quality exceeds the additional costs of producing the premium product. Both the quality indices and cost parameters are exogenously given.

The demand side comprises two types of consumers: There is a mass of \(2\mu >0\) buyers who are brand-anchored and equally divided between both firms. These customers choose between buying a low- and a high-quality item from a particular brand: firm 1 or firm 2. They are characterized by a taste parameter y , which is uniformly distributed on the unit interval [0, 1] and which reflects the willingness to pay for extra quality. Thus, a consumer at the lower bound does not derive utility from more quality, whereas it is maximally valued at the upper extreme.

The remaining consumers are quality-anchored : They have a strict preference for a given quality and only choose between buying from firm 1 or firm 2. Both the standard and the premium quality-anchored buyers are uniformly distributed on the unit interval [0, 1] with mass \(\mu _{\ell }>0\) and \(\mu _h>0\) , respectively. A customer who is ‘located’ at \(x_j\) experiences a disutility of \(\tau _j\cdot x_j\) when buying from firm 1 and \(\tau _j\cdot (1-x_j)\) when buying from firm 2, where \(\tau _j>0\) for \(j=\ell ,h\) . Footnote 6

Our categorisation of customers is in part motivated by some recent findings in the consumer search literature. For example, it has been argued that consumers only search a small part of the attribute space and that state-dependence in search behavior is strong (Kim et al., 2011 ; Bronnenberg et al., 2016 ). This limits consumers’ consideration set (Mehta et al., 2003 ; De los Santos et al., 2012 ) and makes for insufficient comparisons across products and services (Simonson et al., 2013 ; Sela & LeBoeuf, 2017 ). With regard to the presence of quality-anchored buyers, note that this may partly result from differences in income. Indeed, an alternative interpretation is that consumers have the same valuation for quality, but different spending budgets (Gabszewicz & Thisse, 1979 ; Shaked & Sutton, 1982 ; Klumpp & Su, 2019 ).

As is well-known, in these types of spatial settings one can distinguish three cases depending on the set prices: (i) local monopolies; (ii) single monopoly; and (iii) competition. Footnote 7 In the following, we confine ourselves to situations in which the products compete. Case (i) is ruled out by assuming that all consumers buy the good—the market is ‘covered’—which effectively requires the quality index \(\beta \) to be sufficiently high. Specifically, each customer is assumed to purchase one unit of the product so that total market demand is given by \(2\mu +\mu _{\ell }+\mu _h>0\) .

To exclude Case (ii), we employ the notion of ‘social equilibrium’ as introduced by Debreu ( 1952 ). Footnote 8 The distinctive feature of this concept is that the sets of feasible strategies depend on the strategies that are chosen by others. Within the context of our model this means that a firm’s feasible prices are effectively determined by its rival’s price. In particular, for some given segment price of the competitor, a seller cannot set its price so low that it gains the complete segment. Likewise, it cannot pick a price so high that it loses the entire segment. Price differences are thus restricted in such a way that all product types have a positive market share.

Let us now derive demand for each product type. Consider a brand i -anchored buyer ‘located’ at \(y_i\) . This consumer is indifferent between buying the low-quality and buying the high-quality variety when:

where \(p_{ih}\) and \(p_{i\ell }\) are the prices of firm i ’s high- and low-quality product, respectively. Note that the degree to which the premium product is valued more than the standard product is determined by the combination of the ‘objective’ quality measure \(\delta \) and the ‘subjective’ quality measure \(y_i\) .

As an illustrative example, consider the choice between buying a software package with and without a supporting service package. At equal prices, virtually everyone would value the bundle more than the stand-alone software package. This difference in quality is captured by the parameter \(\delta \) . Yet, some customers may have poor computer skills and highly appreciate the additional support, whereas others may be IT experts who require little to no help. This heterogeneity in the ‘valuation of quality’ is captured by the parameter \(y_i\) .

Similarly, a quality j -anchored customer ‘located’ at \(x_j\) in the segment \(j=\ell ,h\) is indifferent between buying from firm 1 and buying from firm 2 when:

Taken together, this gives the following demand for the firms’ high- and low-quality product:

where \({\widehat{y}}_i\equiv \max \big \{\min \big \{\frac{p_{ih}-p_{i\ell }}{\delta },1\big \},0\big \}\) , \(i=1,2\) and \({\widehat{x}}_j\equiv \max \big \{\min \big \{\frac{p_{2j}-p_{1j}+\tau _j}{2\tau _j},1\big \},0\big \}\) , \(j=\ell ,h\) .

Figure  1 provides a graphical illustration of this model.

A stylized illustration of a vertizontally differentiated duopoly with brand-anchored consumers who are located on the dashed vertical segments and quality-anchored consumers who are located on the solid horizontal segments

In the following, we focus on cases in which each product type is bought by both brand- and quality-anchored buyers: \({\widehat{x}}_j\in (0,1)\) , \(j=\ell ,h\) ; and \({\widehat{y}}_i\in (0,1)\) , \(i=1,2\) (see Fig.  1 ). These conditions depend on price differences and are satisfied as long as the differences are not too large. Given that the competitor charges \(p_{kh}\) and \(p_{k\ell }\) , the condition \({\widehat{x}}_j\in (0,1)\) holds when firm i picks prices \(p_{ij}\in (p_{kj}-\tau _j,p_{kj}+\tau _j)\) . Similarly, \({\widehat{y}}_i\in (0,1)\) requires that \(p_{i\ell }\) and \(p_{ih}\) are chosen such that \(0<p_{ih}-p_{i\ell }<\delta \) . Note, however, that for the latter both prices are selected by the same seller. To ensure that \({\widehat{y}}_i\) remains in the interior, we impose the following assumption which effectively provides an upper bound on the difference between competition intensity in both quality segments. Footnote 9

Assumption 1

\(-(c_h-c_{\ell })<\tau _h-\tau _{\ell }<\delta -(c_h-c_{\ell })\) .

In the following analysis, we solve for a Nash equilibrium of this game—which we refer to as competitive pricing equilibrium .

4 Equilibrium Pricing and Analysis

In this section, we explore the nature of price competition between the two firms. Under the assumption that both simultaneously pick prices from their (relative) strategy sets as specified above, firm 1 chooses \(p_{1\ell }\) and \(p_{1h}\) to maximize

whereas firm 2 selects \(p_{2\ell }\) and \(p_{2h}\) to maximize

The next result shows that there is a unique competitive pricing equilibrium and that this equilibrium is symmetric. Moreover, the equilibrium price of the premium product exceeds that of the standard product:

Proposition 1

Under Assumption  1 , there is a unique competitive pricing equilibrium. In this equilibrium, firms set prices symmetrically at:

Furthermore, \(0<p_h^*-p_{\ell }^*<\delta \) . Footnote 10

The way in which equilibrium prices are presented here is reminiscent of the equilibrium outcome in a standard version of Hotelling’s model of horizontal product differentiation: \(p_j^*=c_j+\tau _j\) , \(j=\ell ,h\) . In fact, notice that both prices coincide when the number of brand-anchored buyers becomes negligible: \(\mu \downarrow 0\) .

Even though one might a priori expect firms to set higher prices in the presence of brand-anchored buyers, Proposition  1 reveals that vertizontal equilibrium prices may actually be lower than those in the corresponding horizontal version without brand-loyal customers: when \(\mu \downarrow 0\) . The price of the standard product is, for example, lower than \(c_{\ell }+\tau _{\ell }\) when there is severe price competition in the premium segment ( \(\tau _h\downarrow 0\) ) and relatively low competitive pressure in the other submarket ( \(\tau _{\ell }\uparrow c_h-c_{\ell }\) ).

Likewise, the premium price is lower than \(c_h+\tau _h\) when there is strong price competition in the standard-quality product market ( \(\tau _{\ell }\downarrow 0\) ) and relatively low competitive pressure in the premium segment ( \(\tau _h\uparrow \delta -(c_h-c_{\ell })\) ). Intense price competition in one segment therefore puts downward pressure on prices in the adjacent segment and this ‘negative vertical price effect’ can dominate the ‘positive horizontal price effect’: The presence of brand-anchored buyers can lead to more competitive prices in the segment where price competition is otherwise less severe.

We now proceed by studying comparative statics of the equilibrium prices. The next proposition shows that both prices are increasing in both unit production costs:

Proposition 2

Under Assumption  1 , the equilibrium prices \(p_{\ell }^*\) and \(p_h^*\) are increasing in the unit production costs \(c_{\ell }\) and \(c_h\) .

The firms’ standard and premium prices are naturally increasing in their own production costs. Demand for the adjacent quality then rises with a subsequent price increase in that segment. It can, moreover, be shown that the direct effect dominates the indirect effect, so that an increase in \(c_h\) ceteris paribus boosts low-quality product sales. An increase in \(c_{\ell }\) likewise leads to a rising premium product market share, all else equal.

The impact on prices of a change in the (perceived) quality difference ( \(\delta \) ), horizontal competitive pressure ( \(\tau _{\ell }\) and \(\tau _h\) ), and the number of brand- and quality-anchored buyers ( \(\mu \) , \(\mu _{\ell }\) and \(\mu _h\) ) is less clear. To explore this in more detail, we impose the following condition:

Assumption 2

\(-\frac{c_h-c_{\ell }}{2}<\tau _h-\tau _{\ell }<\frac{\delta -(c_h-c_{\ell })}{2}\) .

This assumption is directly comparable to Assumption  1 and restricts the range within which the horizontal differentiation parameters are allowed to vary.

Let us start by exploring the effect of changes in the horizontal dimension of the model. The following result gives the price impact of changes in the horizontal differentiation parameters and the number of low- and high-quality-anchored consumers.

Proposition 3

Under Assumption  2 , the equilibrium prices \(p_{\ell }^*\) and \(p_h^*\) are increasing in the horizontal differentiation parameters \(\tau _{\ell }\) and \(\tau _h\) and decreasing in the number of low and high quality-anchored buyers \(\mu _{\ell }\) and \(\mu _h\) . Footnote 11

An increase in the horizontal differentiation parameter \(\tau _j\) , \(j=\ell ,h\) , leads ceteris paribus to an increase of prices in segment j . This, in turn, generates more demand in the other segment with a subsequent price increase.

With regard to the number of quality-anchored buyers, more customers in, say, the premium segment intensifies competition in that part of the market with lower premium prices resulting. More brand-anchored buyers are therefore willing to switch to the high-quality product, which in turn makes it less costly to cut prices in the lower segment. As before, the direct effect dominates the indirect effect so that an increase in the number of high (low) quality-anchored buyers results in more high (low) quality product sales. Notice that it is the presence of brand-anchored consumers that drives this effect: Absent a brand-loyal customer base, equilibrium prices would be independent of the mass of quality-oriented consumers.

Next, let us turn to the vertical sphere. The following result shows how the equilibrium prices are affected by changes in the number of brand-anchored customers and the quality difference:

Proposition 4

Under Assumption  2 , the equilibrium prices \(p_{\ell }^*\) and \(p_h^*\) are increasing in the number of brand-anchored consumers \(\mu \) . Furthermore, \(p_{\ell }^*\) is decreasing and \(p_h^*\) is increasing in the quality difference \(\delta \) .

A growing number of brand-anchored buyers naturally enhances the incentive to exploit their loyalty through raising prices.

The price effect of a change in quality difference is more subtle. As one would expect, an immediate effect of an increase in \(\delta \) is that more buyers prefer the high-quality product. The resulting premium price rise does not fully offset this effect, which is partly due to the presence of competition in the high-quality segment. The subsequent loss in brand-anchored consumers who buy the standard product makes it less costly to cut the standard good price and steal some business in the low-quality segment. Overall, however, premium product sales are increasing in the quality difference.

Let us now turn to equilibrium profits: Profits are not trivial to analyze within the current framework, which is particularly due to the richness in the parameters that describe the demand side. By imposing symmetry across quality segments, however, we can establish the following supply-side effect.

Proposition 5

Assume \(\mu _h=\mu _{\ell }\) and \(\tau _h=\tau _{\ell }\) .

If \(\delta >2(c_h-c_{\ell })\) , then equilibrium profits \(\pi _1^*\) and \(\pi _2^*\) are increasing in \(c_{\ell }\) and decreasing in \(c_h\) .

If \(\delta <2(c_h-c_{\ell })\) , then equilibrium profits \(\pi _1^*\) and \(\pi _2^*\) are decreasing in \(c_{\ell }\) and increasing in \(c_h\) .

This result reveals that equilibrium profits can decrease, but may also increase in unit production costs. If the quality difference between the standard and premium product is sufficiently large, then profits are decreasing in \(c_{h}\) and increasing in \(c_{\ell }\) . The reason is as follows: If \(\delta >2(c_{h}-c_{\ell })\) , then the majority of brand-anchored buyers opts for the premium product: \({\widehat{y}}_{i}^{*}=\frac{p_{ih}^{*}-p_{i\ell }^{*}}{\delta }<\frac{1}{2}\) is relatively low. Footnote 12 The reduced price-cost margin \(p_{ih}^{*}-c_{h}\) would therefore result in relatively large losses. This negative direct effect is only partly offset by the positive indirect effect: the rise in the price of the standard good. The latter effect is smaller since only a modest part of the brand-anchored buyers prefers the low-quality product when the quality difference is high.

In a similar fashion, equilibrium profits increase in \(c_{\ell }\) . The direct effect is again negative, but relatively small since few brand-anchored consumers choose the standard good. By contrast, the positive indirect effect that comes from the increase in the premium price is comparably big because of the large share of brand-anchored buyers that picks the high-quality product. The combined effect is positive when \(\delta \) is sufficiently high. A similar logic applies when the difference in quality is sufficiently low, meaning that the majority of brand-anchored buyers opts for the standard good: \({\widehat{y}}_{i}^{*}=\frac{p_{ih}^{*}-p_{i\ell }^{*}}{\delta }>\frac{1}{2}\) is relatively high. In that case, profits are decreasing in \(c_{\ell }\) and increasing in \(c_{h}\) .

In sum, firms benefit from a segment-wide cost decrease in the most popular submarket. Strikingly, however, they also benefit from a segment-wide cost increase in the least popular submarket. The negative direct effect of the cost increase is more than compensated for by the resulting price increase in the adjacent popular segment. Footnote 13

5 Asymmetries

In this section and in Sect.  6 , we consider price competition in the vertizontally differentiated duopoly when there is some asymmetry between the sellers. We examine two types of asymmetries: asymmetry in demand- and supply-side parameters; and (in Sect.  6 ) asymmetry in organizational structure. To maintain tractability, it is assumed throughout this section that \(\mu _{h}=\mu _{\ell }\) , \(\tau _{h}=\tau _{\ell }\) , and \(c_{\ell }=0\) . Footnote 14

5.1 Demand- and Supply-side Parameters

We discuss two possible demand-side asymmetries that relate to consumer preferences: (1) the number of brand-anchored consumers in the vertical segments; and (2) the product taste of quality-anchored consumers in the horizontal segments. We also consider a possible supply-side asymmetry: unit cost of producing the premium product.

To begin, suppose there is a difference in brand-loyal customer bases. In that case, we find that the firm with more brand-anchored buyers ceteris paribus charges a higher price for both the standard and the premium product. Being the higher-priced firm, this seller consequently captures a smaller share of the quality-anchored buyers. However, the implied lower market share is more than compensated for by the higher mark-up so that the firm with the larger brand-loyal customer base is the one making more profit.

Let us now turn to the possibility that quality-oriented buyers have different tastes for both brands. Specifically, it is assumed that \(\tau _{\ell }\) ( \(=\tau _{h}\) ) are different for the two firms. In this case, we find that the favorite firm—the seller with the lower \(\tau \) —sets the higher price for both product varieties. Taking a comparative statics perspective, this firm is able to harvest its brand-loyal customer base without losing too much share in the two quality segments. In fact, the equilibrium is such that it still has the higher market share in each horizontal submarket. Since there are no differences in the vertical segments, this implies that the firm with the lower \(\tau \) earns the highest profits.

Third, suppose that one of the sellers faces higher costs when producing its premium product. This firm then charges a higher price for its high-quality good, which implies a smaller market share in the premium segment. Interestingly, this high-cost supplier becomes the lower-priced firm in the standard segment. The implied larger market share in the low-quality segment does not make up for its disadvantageous position in the premium segment, however. Overall, therefore, it is the low-cost supplier that makes more profit.

6 Organizational Structure

A different type of asymmetry that can affect the competitive pricing equilibrium concerns the allocation of pricing authority. In the preceding analysis, we have assumed pricing decisions to be taken at the firm level. Yet, and as already touched upon in Sect.  2 , companies sometimes choose to delegate such decisions to lower-level management or sales departments. Within the context of our model, decentralized pricing means that pricing decisions are taken at the product quality type level.

The issue of (de-)centralized pricing has been addressed by McGuire and Staelin ( 2008 ) within the context of a vertical production chain. Amongst others, they show that decentralized decision-making is a Nash equilibrium when products are sufficiently close substitutes. Moorthy ( 1988 ) offers conditions under which (de-)centralized pricing emerges as an equilibrium. Bhardwaj ( 2001 ) extends these analyses by explicitly taking account of sales agents’ effort. He finds that firms prefer centralized pricing when there is sufficiently intense effort competition.

Under the parameter restrictions that we impose to maintain tractability— \(\mu _{h}=\mu _{\ell }\) , \(\tau _{h}=\tau _{\ell }\) , and \(c_{\ell }=0\) —we find that centralized pricing is an equilibrium and decentralized pricing is not. Footnote 15 Yet, when firms adopt a different organizational structure, it is the seller that delegates pricing authority that makes more profits. If we take a Darwinian dynamic perspective as in Alchian ( 1950 ) and Vega-Redondo ( 1997 ), this suggest that decentralized pricing may become the dominant organizational mode. In the next section, we explore the possibility that both sellers delegate pricing decisions to the product division level in more detail.

6.1 Centralized Versus Decentralized Pricing

We now direct attention to the case in which both firms have delegated pricing authority and compare this with the centralized pricing results presented in Sect.  4 . Since prices are determined at the product quality type level, these quality divisions effectively operate as distinct firms: With decentralized pricing there is competition among four rather than two vertizontally differentiated market entities. In what follows, we show that with decentralized pricing: (i) consumers are better off; (ii) firms are worse off; and (iii) society as a whole is worse off. Moreover, the market share of the standard product is shown to increase (decrease) with decentralized pricing when the marginal costs of quality is sufficiently low (high).

The next result is directly comparable to Proposition  1 and shows that there is again a unique (and symmetric) competitive pricing equilibrium when prices are set at the product type level. Akin to the centralized pricing case, the equilibrium price of the premium product exceeds that of the standard good.

Proposition 6

Under Assumption  1 and \(\delta \ge \max \{\tau _{\ell },\tau _h\}\) , there is a unique competitive pricing equilibrium. In this equilibrium, firms set prices symmetrically at:

Furthermore, \(0<p_h^{\circ }-p_{\ell }^{\circ }<\delta \) .

To avoid complex expressions, but without renouncing any factor that is crucial to the understanding of the mechanic forces when comparing decentralized pricing with centralized pricing in the context of the vertizontally differentiated market, we restrict the parameters to \(\mu _h=\mu _{\ell }=\mu =1\) and \(\tau _h=\tau _{\ell }\) and assume \(\delta \ge \max \{\tau _{\ell },\tau _h\}\) (such that \({\widehat{y}}^{\circ }\in (0,1)\) ). Doing so, we obtain the following result.

Proposition 7

Prices and profits are lower under decentralized pricing than under centralized pricing. Moreover,

If \(\delta >2(c_h-c_{\ell })\) , then there is greater demand for low quality under decentralized pricing than under centralized pricing.

If \(\delta <2(c_h-c_{\ell })\) , then there is greater demand for high quality under decentralized pricing than under centralized pricing.

This proposition shows that producer surplus—which is defined as the sum of profits—is lower when pricing authority is delegated. This is a direct consequence of increased competition. By contrast, consumers benefit from decentralized pricing. Indeed, each non-switching customer benefits from a lower price, and those who do switch benefit even more.

Notice that whether demand shifts from the standard to the premium segment or vice versa depends on the marginal cost of quality. If \(\delta >2(c_{h}-c_{\ell })\) , then the amount of premium products that are sold under centralized pricing exceeds the amount of standard products that are sold. A transition to decentralized pricing results in a price reduction for all products. However, since the premium product has the bigger market share, the corresponding marginal revenue is lower: It is ceteris paribus more costly to reduce the price of the premium product than that of the standard good. Delegating pricing authority in this case consequently leads to an increase in the equilibrium price difference, which implies an increase in the standard good’s market share (Proposition  7 (i)). As Proposition  7 (ii) shows, the opposite occurs when \(\delta <2(c_{h}-c_{\ell })\) .

To determine the net welfare effect, first note that the market is covered under both centralized and decentralized pricing. As long as customers do not switch between product types, therefore, a change in the locus of pricing authority would only cause a redistribution of welfare. Consequently, any change in total surplus should come from those who switch between the low- and high-quality product type. Proposition  7 (i) shows that if \(\delta >2(c_{h}-c_{\ell })\) , then for each brand there is an interval Y of brand-anchored buyers who switch from the high- to the low-quality product. Likewise, Proposition  7 (ii) shows that when \(\delta <2(c_{h}-c_{\ell })\) , there is an interval Y of brand-anchored buyers who switch in the opposite direction.

These switching consumers \(y\in Y\) create a welfare gain (loss) by a reduction (increase) in \(c_{h}-c_{\ell }\) and a welfare loss (gain) of \(\delta y\) . Aggregating these differences over all switching consumers gives the change in overall welfare,

which leads to the following conclusion:

Proposition 8

Decentralized pricing unambiguously yields a welfare loss.

The logic behind this result is as follows: Suppose that \(\delta >2(c_{h}-c_{\ell })\) , so that the market share of the standard product increases when moving from a centralized to a decentralized pricing system (Proposition 7 (i)). Since part of the premium products are replaced with standard products, there is a saving in production costs. This has a positive effect on societal welfare. There is, however, a counter effect: First, the switching customers lose the benefit of having a higher-quality product \(\delta \) ; this is an effect that is relatively substantial in this case. Second, those who switch have a relatively high valuation for quality: y is relatively high. Together, this implies that the loss \(\delta y\) of a switching customer with valuation y is large and, in fact, so large that it outweighs the positive cost-saving effect.

Now suppose that \(\delta <2(c_{h}-c_{\ell })\) , so that the market share of the premium product increases when moving from a centralized to a decentralized pricing system (Proposition  7 (ii)). This results in an increase in production costs, which negatively affects social welfare. There is also a positive effect \(\delta y\) , because a switching customer with valuation y now consumes the premium product. Notice, however, that in this case switching customers have a fairly low valuation for quality— y is ‘small’—and that the extra quality of a premium product is limited: \(\delta \) is ‘small’. As Proposition  8 reveals, the additional gain from an increase in the premium product’s market share is insufficient to compensate for the additional costs of producing the high-quality good.

7 Concluding Remarks

In this paper, we consider strategic pricing by sellers that supply multiple quality variants of their product and simultaneously compete ‘head-to-head’ in the corresponding quality-segments. Specifically, we analyzed a duopoly model of vertizontal product differentiation in which firms offer a standard and a premium good. Under the assumption that demand includes both brand- and quality-anchored buyers, we established the existence of a unique (and symmetric) competitive pricing equilibrium. These equilibrium prices are increasing in the degree of brand differentiation as well as in the number of brand-anchored buyers. Moreover, equilibrium profits may increase in production costs and the equilibrium price of the standard (premium) product is decreasing (increasing) in the quality difference.

We contrasted these findings with the possibility that pricing decisions are taken decentrally at the product type level. We prove there is again a unique (and symmetric) competitive pricing equilibrium in which both prices and profits are lower than in the centralized case. We furthermore find that demand for the standard product is higher when the quality difference is sufficiently large and show that welfare is unambiguously lower with decentralized pricing.

There are several natural avenues for future research: One is to extend the dimensions of the model: the number of firms or of quality segments. This, however, is likely to prove challenging in terms of deriving explicit and meaningful expressions. Another is to use this framework to analyze competition among multi-product and single-product, niche, firms. Finally, it is worth exploring what type of vertizontally differentiated markets may emerge endogenously. The interesting question is then under what conditions firms would position themselves ‘head-to-head’ along the quality spectrum when engaging in price competition.

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Source: https://www.petfoodprocessing.net/articles/12825-state-of-the-us-pet-food-and-treat-industry .

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As reported in Nocke and Schutz ( 2018 ), multiproduct firms account for 91% of total output and 41% of the number of firms in the U.S. with an average four-firm concentration ratio of 35% in U.S. manufacturing when measured at the NAICS 5-digit level.

At the firm level, therefore, brand-anchored buyers are ‘captive’ and quality-anchored buyers are ‘non-captive’. See, for instance, Sonderegger ( 2011 ).

As in Altomonte et al. ( 2016 ) and Desai ( 2001 ), this model therefore allows for asymmetric horizontal product differentiation across market segments.

See, for instance, Tirole ( 1988 ).

For a discussion and appraisal of this equilibrium concept, see Dasgupta and Maskin ( 2015 ).

As will become clear in the next section, Assumption  1 is a sufficient condition for the existence of a unique Nash equilibrium in which \({\widehat{y}}_i\in (0,1)\) . Given the equilibrium prices, one can then easily derive restrictions on the relative prices such that this equilibrium is indeed a social equilibrium.

It can be easily verified that \(c_h>c_{\ell }\) implies \(p_{\ell }^*\ge c_{\ell }\) and \(\delta >c_h-c_{\ell }\) implies \(p_h^*\ge c_h\) .

It is worth noting that Assumption  1 would be sufficient to establish the reported impact of \(\tau _{\ell }\) and \(\tau _{h}\) .

One can verify that \(p_{ih}^{*}-p_{i\ell }^{*}=c_{h}-c_{\ell }\) when \(\delta =2\left( c_{h}-c_{\ell }\right) \) so that \({\widehat{y}}_{i}^{*}=\frac{c_{h}-c_{\ell }}{\delta }=\frac{1}{2}\) . In that case, the number of premium products that are sold equals the number of standard products that are sold.

Within the context of a homogeneous-good Cournot oligopoly game, Kimmel ( 1992 ) shows that firms may benefit from an industry-wide cost increase. In our model, the covered-market assumption contributes to this result.

The Mathematica code and output on which the reported findings are based are provided in an online appendix to this paper, which is publicly available on the Open Science Framework (OSF; doi: 10.17605/osf.io/wcd7s) and accessible via https://osf.io/wcd7s/ .

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We appreciate the comments and suggestions of two anonymous reviewers and the editor, Lawrence White. Bos and Peeters acknowledge the hospitality of the Maastricht University School of Business and Economics and the University of Otago, where part of this research was conducted.

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Appendix: proofs, proof of proposition 1.

The first-order conditions for the two simultaneous maximization problems yield the following system of linear equations:

For both firms, solutions being maxima of their respective maximization problem is guaranteed by the negative definite Hessians:

Since the matrix of coefficients in the system of linear equations is non-singular, we know that this system has one real solution. Moreover, given that asymmetric equilibria need to come in pairs, this solution must be symmetric. Exploiting this symmetry (that is, assuming \(p_{1\ell }=p_{2\ell }=p_{\ell }\) and \(p_{1h}=p_{2h}=p_h\) ), the above system reduces to

Solving this system gives the solution \((p_{\ell }^*,p_h^*)\) as specified in the proposition. Finally, feasibility conditions for the demand being well-specified (i.e., \({\widehat{y}}_1,{\widehat{y}}_2\in (0,1)\) at prices \(p_{\ell }^*\) and \(p_h^*\) ) requires \(p_h^*>p_{\ell }^*\) and \(p_h^*-p_{\ell }^*<\delta \) . As one can easily verify, Assumption  1 is a sufficient condition for \(p_h^*>p_{\ell }^*\) and \(p_h^*-p_{\ell }^*<\delta \) .

\(\square \)

Proof of Proposition 2

The first derivative of \(p_{\ell }^*\) with respect to \(c_{\ell }\) and \(c_h\) is respectively given by:

and the first derivative of \(p_h^*\) with respect to \(c_{\ell }\) and \(c_h\) is respectively given by:

Proof of Proposition 3

The first derivative of \(p_{\ell }^*\) with respect to \(\tau _{\ell }\) , \(\tau _h\) , \(\mu _{\ell }\) and \(\mu _h\) is respectively given by:

The first derivative of \(p_h^*\) with respect to \(\tau _{\ell }\) , \(\tau _h\) , \(\mu _{\ell }\) and \(\mu _h\) is respectively given by:

The terms in squared brackets in the numerator are positive by Assumption  2 .

Proof of Proposition 4

The first derivative of \(p_{\ell }^*\) with respect to \(\mu \) and \(\delta \) is respectively given by:

The first derivative of \(p_h^*\) with respect to \(\mu \) and \(\delta \) is respectively given by:

In determining the sign of these derivatives, notice that the term in squared brackets in the numerators is positive by Assumption  2 .

Proof of Proposition 5

Setting \(\mu _{\ell }=\mu _h\) and \(\tau _{\ell }=\tau _h\) , the first derivative of \(\pi ^*\) with respect to \(c_{\ell }\) and \(c_h\) is given by:

The term in the squared brackets determines the sign of the derivatives.

Proof of Proposition 6

The first-order conditions for the four simultaneous maximization problems yield the following system of linear equations

Since the matrix of coefficients in the system of linear equations is non-singular, we know that this system has one real solution. Moreover, given that asymmetric equilibria need to come in pairs, this solution must be symmetric. Exploiting this symmetry—assuming \(p_{1\ell }=p_{2\ell }=p_{\ell }\) and \(p_{1h}=p_{2h}=p_h\) —the above system reduces to

Solving this system gives the solution \((p_{\ell }^{\circ },p_h^{\circ },)\) as specified in the proposition. Finally, feasibility conditions for the demand being well-specified (i.e., \({\widehat{y}}_1,{\widehat{y}}_2\in (0,1)\) at prices \(p_{\ell }^{\circ }\) and \(p_h^{\circ }\) ) requires \(p_h^{\circ }>p_{\ell }^{\circ }\) and \(p_h^{\circ }-p_{\ell }^{\circ }<\delta \) . It can be verified that Assumption  1 and \(\delta \ge \max \{\tau _{\ell },\tau _h\}\) are a sufficient condition for \(p_h^{\circ }>p_{\ell }^{\circ }\) and \(p_h^{\circ }-p_{\ell }^{\circ }<\delta \) .

Proof of Proposition 7

For \(\mu _h=\mu _{\ell }=\mu =1\) and \(\tau _h=\tau _{\ell }=\tau \) , we have:

From this, we obtain the profits

The statement in the proposition follows from a comparison of these values.

Proof of Proposition 8

If \(\delta >2(c_h-c_{\ell })\) , then \(Y=[{\widehat{y}}^*,{\widehat{y}}^{\circ }]\) and the change in welfare is given by

Alternatively, if \(\delta <2(c_h-c_{\ell })\) , then \(Y=[{\widehat{y}} ^{\circ },{\widehat{y}}^*]\) and the change in welfare is given by

Both expressions lead to

which is negative.

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Bos, I., Peeters, R. Price Competition in a Vertizontally Differentiated Duopoly. Rev Ind Organ 62 , 219–239 (2023). https://doi.org/10.1007/s11151-023-09895-0

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Understanding a Duopoly

Duopoly vs. duopsony.

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Two Main Types of Duopoly

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A duopoly is a situation where two companies together own all, or nearly all, of the market for a given product or service. A duopoly is the most basic form of oligopoly , a market dominated by a small number of companies. A duopoly can have the same impact on the market as a monopoly if the two players collude on prices or output.

Key Takeaways

• A duopoly is a form of oligopoly, where only two companies dominate the market.
• The companies in a duopoly tend to compete against one another, reducing the chance of monopolistic market power.
• Visa and Mastercard are examples of a duopoly that dominates the payments industry in Europe and the United States.
• One disadvantage of duopolies is that consumers have little choice in products.
• Another disadvantage of duopolies is that the two players may collude and increase prices for the consumer.

In a duopoly, two competing businesses control the majority of the market sector for a particular product or service they provide. A business can be part of a duopoly even if it provides other services that do not fall into that market sector. For example, Google and Meta (formerly Facebook) have dominated digital advertising for much of the 21st century, and they function as a duopoly in that field. However, Google is not associated with a duopoly in its other product sectors, such as computer software.

A duopoly is a form of oligopoly and should not be confused with a monopoly , where only a single producer exists and controls the market. With a duopoly, each company will tend to compete against the other, keeping prices lower and benefiting consumers. However, since there are only two major players in an industry under a duopoly, there is some likelihood that a monopoly could be formed, either through collusion between the two companies or if one goes out of business.

In a duopoly, oligopoly, or monopoly, the parties involved may collude and use their power to inflate prices. Since it results in consumers paying higher prices than they would in a truly competitive market, collusion is illegal under U.S. antitrust law.

A duopoly is a particular type of oligopoly, An oligopoly exists when a few businesses control the vast majority of the market sector. While a duopoly qualifies as an oligopoly, not all oligopolies are duopolies. For example, the automobile industry is an oligopoly because there are a limited number of producers, but more than two, who must respond to worldwide demand .

A duopoly should not be confused with a duopsony . In a duopoly, two competing businesses control the majority of the market sector for a particular product or service they provide. For example, Coca-Cola and Pepsi represent a duopoly because the two firms control almost the entire market for cola beverages.

A duopsony, however, is an  economic condition  whereby there are only two large buyers for a specific product or service. The buyers thus have considerable bargaining power and can determine market demand as long as there are plenty of firms vying to sell to them.

Intel Corp. ( INTC ) and Advanced Micro Devices Inc. ( AMD ) are an example of a duopsony. Combined, they command nearly 100% of sales in the computer processing chip market and have substantial influence over their suppliers. Duopsony is also known as a "buyer's duopoly" and is related to oligopsony , a term describing a market where there are a limited number of buyers.

Advantages and Disadvantages of a Duopoly

The two companies benefit by cooperating to improve profits.

Companies do not have to constantly engage in fruitless competition or worry about disruptors.

Prices may be controlled by the rivalry between the two companies.

Free market trading and the entrance of new companies are restricted.

Industry innovation and progress can be curtailed.

Consumers have limited options.

Price fixing and collusion may cost consumers more.

Duopolies can have both positive and negative effects on the companies in the duopoly and the consumer. First, the two companies can cooperate with each other and maximize their profits as there are no other competitors. In other words, there is a collusive cooperative equilibrium. The companies in a duopoly can concentrate on improving their existing products rather than feeling pressure to create new products for the market. Because the two companies compete with each other, the consumer benefits because prices are controlled to some extent and do not become monopoly prices.

The disadvantages of duopolies are that they limit free trade. With a duopoly, the supply of goods and services lacks diversity, and there are limited options for consumers. Also, it is difficult for other competitors to enter the industry and gain market share. The absence of competitors in a duopoly stifles innovation. With a duopoly, prices may be higher for consumers when the competition is not driving prices down.

Price fixing and collusion can occur in duopolies, which means consumers pay more and have fewer alternatives.

The two main types of duopoly are the  Cournot  duopoly and Bertrand duopoly.

The Cournot duopoly model states that the quantity of goods or services produced structures the competition between companies in an industry. According to the model, the two companies decide collaboratively to split the market. If one company alters its production levels, the other company must also alter its production to maintain the equilibrium of a 50/50 split of the market.

On the other hand, the Bertrand duopoly model states that price, not production quantity, structures the competition between the two firms. The model posits that consumers will choose the lower-priced product when given two choices of equal quality. This implies that the two companies in the duopoly will engage in a price war to gain market share.

Boeing and Airbus have been considered a duopoly for their command of the large passenger airplane manufacturing market. Similarly, Apple and Samsung dominate the smartphone market. While there are other companies in the business of producing passenger planes and smartphones, the market share is highly concentrated between the two businesses identified in the duopoly.

Visa ( V ) and Mastercard ( MA ) are considered a duopoly. The two financial powerhouses own over 80% of all European Union card transactions. This dominance has led the European Central Bank (ECB) to try to find ways to break up the duopoly. So far, the ECB has tried interchange fee caps, but a new scheme that would allow instant payments using national payment cards across European countries could be a game-changer.

A European infrastructure for instant payments would eliminate the need for people to use the global services of Visa or Mastercard. Another suggestion is to allow instant payments at points of interaction or points of sale so that the need for the traditional cards would disappear altogether.

A duopoly exists when two companies dominate a market for a given product or service. A duopoly can have the same impact on the market as a monopoly if the two players collude on prices or output.

An example of a duopoly is the dominance that Apple and Samsung have over the smartphone market.

A duopoly is the most basic form of oligopoly, which is a market dominated by a small number of companies.

There are plenty of examples of duopolies in today's markets—Coca-Cola and Pepsi in the soda industry and Apple and Samsung in the smartphone industry are two of them.

Duopolies are a form of oligopoly, and the biggest disadvantage of duopolies, oligopolies, and monopolies is that the companies involved can dominate markets, collude with each other, and raise prices for the consumer.

U.S. Department of Justice. " Price Fixing, Bid Rigging, and Market Allocation Schemes: What They Are and What to Look for ." Accessed Nov. 25, 2021.

Finextra. " ECB Chief Says Instant Payments Could Break Visa/Mastercard Duopoly ." Accessed Nov. 25, 2021.

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Woolworths vs Coles: The Australian Supermarket Duopoly

Table of contents.

At the engine of our modern capitalism is competition. Companies fight for market share, customer loyalty, and survival – at the end of the day. And it’s through these epic battles, that we as consumers get better products at better prices over the long term. A great example of this sort of hard-fought competition is the rivalry between Woolworths and Coles in the Australian supermarket space. 

• ‍ ‍ 995 stores
• ‍ 210,067 employees
• ‍ $44.44 AUD billions in revenue FY21 (Australian Food)
• On average 27.8 million customers served per weekN/D
• 800+ stores
• 112,269 employees
• $33.85 AUD billions in revenue FY21 (Supermarkets)

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From Humble Beginnings

Woolworths opened their doors back in 1924 with a single store in Sydney, and a dream to make it big [1] . 3 years later, they opened a second store on the back of the early momentum and officially became a chain. The offering was successful from the beginning because of the perfect match with the consumer requirements at the time. The middle class was growing and as purchasing power increased, so did the demand for supermarkets. Woolworths rode this trend and rapidly scaled across the country, bringing their unique ethos and way of doing business to people the nation over.

By 1959, they had 300 stores in operation, and they had established themselves as a key player in the industry, one that had significant bargaining power when it came to dealing with vendors and suppliers of all kinds. They began to launch their own white-label brands, acquire smaller players, and quickly became a corporation that wielded immense influence in every consumer vertical that you can imagine. Everything from clothing, to food, to drinks, to household items – they worked their way into each, eventually delivering a supermarket experience that was extremely hard to beat.

In 1993, Woolworths listed on the public markets in what was Australia’s largest ever share float at the time. Once again this accelerated the growth of the company and if you fast forward to today, you can see that they haven’t slowed down since.

Coles got started ten years earlier than Woolworths (1914) with much less fanfare [2] . It was a different time economically and founder GJ Coles opened his store in Victoria with a goal of creating a simple and honest store experience for his customers. As they rode the waves of the Great Depression and the aftermath of World War II, they slowly pivoted their offering to target the married women who had now joined the workforce and were looking for a much more convenient and efficient shopping experience, due to the new time constraints.

Under this mandate, they launched themselves headfirst into a range of different industries including foodstuffs, appliances, cosmetics, and so much more. There was no limit to what they would consider and the only thing that mattered was finding out what customers wanted.

One of the key pillars of Coles' philosophy was to be altruistic wherever possible. GF Coles really wanted his creations to do good in society and he was constantly looking to find ways to donate portions of his profits to hospitals, nursing homes, relief funds, and anywhere else where there was a desperate need. He believed that businesses had a social responsibility to the communities that they operated in, and that ethos carried forward into everything they did. It felt like a safe, warm space for customers to get what they needed, while also knowing that a small piece of their shopping would go to support people in more difficult circumstances than they were.

As the years rolled on, Coles expanded their empire, transforming their early success into a national phenomenon. With every new store came better options for customers, more variety in terms of items, and a more streamlined experience all around. If you look at them today, it’s clear that they’ve come a long way from very humble beginnings, and they represent the quintessential modern supermarket chain. It’s been one hell of a ride.

Finding Their Lane

It’s easy to look at how supermarkets like Woolworths and Coles are set up today and assume that it’s always been that way. But that’s simply not the case. The supermarket industry has ebbed and flowed over the years, disrupting itself time and again, while adjusting to the changing consumer needs at every step along the journey.

Small innovations like an in-built car-park, or self-service shopping might be second nature to us now, but it was these titans of industry that brought them to us. The story of the modern supermarket is one that has constantly followed the macro-economic trends of their customers, trying their best to deliver a shopping experience that was not only one of utility but one that would keep you coming back.

At the start, both Woolworths and Coles had a pretty simple objective. In their native Sydney and Victoria respectively, they wanted to understand the local context and provide the exact goods that the locals needed. The target market was extremely narrow and because your customer base was small, you could be very specific with what you did, because of the constant feedback that you would receive on a day-to-day basis.

It was only when both companies began to grow did they have to start thinking much more strategically about how they would position themselves on the national stage. All of a sudden, the things that helped them succeed as small family-owned stores in their respective neighborhoods weren’t relevant anymore. They had to find a lane for themselves that would resonate with a much wider client base, in a radically changing time.

The one key macroeconomic event that caused a dramatic shift was, of course, the impact of World War II. The post-war economy looked very different from what came before. The economic shift notwithstanding, there was a cultural shift in terms of how people went about their lives.

This coincided with the women’s movement which brought more and more women into the workforce, changing the dynamics of what it meant to run a family home. The supermarkets had to change their messaging, their product offering, and everything about them to adapt to the new normal. It required lower prices, bigger variety, and more convenience because with most adults now in the workforce, there wasn’t a lot of time left for grocery shopping.

This cultural shift meant that the supermarket became one focused on efficiency. Could they fit everything under one roof so that customers only had to go to one place? This value proposition alone would draw consumers in – so it became the holy grail.

How do you stock everything?

Of course, the nature of a one-stop shop is that you’re the only one in town. But as Woolworths and Coles were beginning to discover, that wasn’t the case. As their target markets began to overlap, they started to compete with one another for the same customers. Both companies were selling mostly the same products, and so it was about competing on price, in-store experience, and other less tangible features as they scaled across the country.

We’ll dive into this competition in more detail in a bit, once we’ve done some more work setting the foundation for the battle.

Key Takeaway: You must be constantly adjusting to the macro-economic and cultural shifts that are affecting your customers, or you risk becoming detached and eventually made irrelevant.

Innovations

Both Woolworths and Coles were considered significant innovators because they were constantly pushing themselves to improve the customer experience. Some of these were genuinely new and ground-breaking, while others borrowed inspiration from an idea that already existed and repackaged them for the market they were serving. In each case, there was always a sense that they were pioneers in the space, changing what it meant for the Australian middle class to buy their essentials.

Here are some of the key innovations that Woolworths and Coles pioneered:

• Self-Service. This seems completely normal to us now but there was a time where self-service within stores wasn’t a thing. You would have to ask the shopkeeper to get the items that you needed, and the shop wasn’t really set up for browsing. In around 1955, Woolworths introduced the first self-service store where customers could walk up and down the aisles, collecting what they needed, and then they would pay for it at a cash register. This completely reshaped the retail experience, and it was very quickly copied by everyone in the industry because of what it did for efficiency.
• Sales Catalogues. In the early ‘50s, GJ Coles revolutionized the one-stop shop by creating store catalogs that would show every item that was available at a Coles store. This became the key resource for any shoppers in the area and allowed them to browse the store’s offerings from home, plan their shop, and then come in to get whatever they needed. It seems simple to us but at the time it took an awful lot of effort to get it right and they were one of the first companies to do it at scale.
• Freestanding Supermarkets. Both Woolworths and Coles pioneered the freestanding supermarket that wasn’t connected to other establishments and had a big car park for its customers. This points to how big the stores were starting to get and it made sense to get their own premises on which to build these gigantic operations. If you had told someone from the ‘20s that you’d have giant freestanding supermarkets, they would have told you that you were crazy.
• Inventory Tracking. As these two companies moved into the digital age, starting in the 90s, they were both at the forefront of barcode-based inventory tracking which helped to manage the tremendous volume of items coming in and going out of each store. Instead of having to do things manually, a combination of software and barcode scanners helped to automate a lot of the tedious routine tasks and allow for much better data collection which helped to drive business decisions. Of course, we’ve come a long way since then, but these early technological leaps transformed how big retailers did things.
• White Label Brands. Once Woolworths and Coles got to a certain scale, they had various opportunities to improve their margins by creating white-label house brands which they could sell alongside their vendor-supplied alternatives. They had built the trust in their consumer base and by using their negotiation power and good storytelling, both chains created brands that resonated with consumers across the country. Some of them still dominate the market today and while this was not a new idea, it was executed to perfection by both companies – changing the way that mass-market consumables were marketed and utilized.
• Rewards Programs. As these companies started to gather more and more data on their customers, they realized that they could subtly encourage certain behaviors and reward their top customers by creating a customer loyalty program. The trick was to create enough value for consumers so that signing up would be a no-brainer, and then they could benefit from the improved data on the back end. All of this could then be used to improve the experience and create even more customer satisfaction. Today, every store tries to do this, with varying levels of success, but it was these two supermarket chains who really pushed this in the early days.

Those are just a few of the innovations that came out of the rise to the top, and while most of them may seem obvious to us now – they represented leapfrog changes in their time. These innovations are what kept them at the top of the pile and why we’re writing about them right now, as opposed to the other competitors that have faded into the annals of time.

Key Takeaway: What seems obvious to us now represented a game-changing innovation in the past. What new concept can you bring to life today that will look obvious to us in the future? Is there low-hanging fruit that is right in front of you?

Expansion Beyond the Supermarket

It’s also worth noting that neither Woolworths nor Coles stopped at the supermarket. They realized, as many well-known consumer brands do, that their influence is only limited by their imagination. By the time that they were controlling the supermarket industry, they had built up a tremendous amount of brand equity in the minds of consumers that could be relatively easily translated into other endeavors.

We saw expansions into service and petrol stations which aimed to create highly convenient, bite-sized shopping experiences for those who were filling up their cars. Both companies made a range of different acquisitions that either kept running as they were or were integrated into the retail family to bring even more under one roof.

This is not to say that all of these moves succeeded, however. One notable failure that stains the history of Australian retail was an attempt by Woolworths to enter the home improvement space. In order to compete with Bunnings, the market leader, they created a brand called ‘Masters Home Improvement’ through a joint venture with Lowe’s. The idea was to create the same sort of ethos and customer experience that Woolworths customers had become accustomed to but focus it on the world of home improvement.

They couldn’t make it work though, and they proceeded to lose billions of dollars in the process. It was in 2016 when they declared it a failure and exited the market entirely. Interpret this as you will, but from where we’re seated – this looks like a story of a company biting off more than they can chew. While brand strength and operational know-how are powerful, you still have to have a deep understanding of the new industry you’re entering and how to best deliver the service that you need to compete. Woolworths got this one wrong and returned their efforts to the supermarket battle with Coles that rages to this day.

Key Takeaway: Venturing out of your vertical doesn’t always work, no matter how strong your brand is. Do so carefully and with the right research and risk mitigation behind you.

The Battle for Supremacy

If you look back on it now, these two companies seemed destined to come together eventually. Even though they were started in two different places, in different times, the similarities of what they were trying to accomplish, and the philosophy they were applying to get there, were remarkably similar. The moment they started to enter the same towns; they were bound to compete.

In some ways, the competition between Woolworths and Coles has been one that has typified Australian retail. It feels like it’s perfectly positioned for a management consulting case study because of how well-matched the competition has been and how we’ve seen them go toe to toe for years now [3] .

In the 1950s, their combined market share was only 10%. But this quickly rose to 34% by the 1970s and up to 65% by 2008 [4] . The growth seen by both dwarfed anything that the other players could match and so they become somewhat obsessed with one another. If you read any memoirs or stories from the early days, you get the sense that they were at each other’s throats from the very beginning.

Every time one of them developed a new concept or idea, it would cause a ripple effect on the other side, while the other company tried to copy it as quickly as they could. Back and forth they traded innovations in technology, customer experience, operational efficiency, messaging, and much more. Competitive advantages were short-lived because both companies employed teams whose sole job it was to monitor their peer and report back on how things were shifting on that side.

It’s rare that you get these sorts of competitions where both parties are equally strong. Typically you hear the story of a large company bullying a smaller one, or an agile company out-maneuvering a larger one. But here, you had two major corporations, operating at scale, embarking on a constant battle for the next consumer [5] .

A lot of this battle revolved around real estate and foot traffic. As both companies were going after the same customers, they wanted to locate their new stores in the prime locations that would maximize awareness. This is a core part of retail strategy, of course, and both companies were trying to eke out whatever benefits they could from the land they could get their hands on. Shopping centres often welcomed this battle because they were considered anchor tenants and their brands could easily raise the status of any new complex.

However, the battle over real estate has calmed down in the modern era. The differences in plots became much less important, and with enough scale, customers would come directly to the stores intentionally. You didn’t need to capitalize on impulsive window shoppers anymore.

And so, as it often does, the competition came down to price.

The Race to the Bottom

In the world of the supermarket, there is only so much you can do in terms of product differentiation. As the global supply chain democratized access to the major distributors and suppliers, both Woolworths and Coles essentially housed the same items inside their stores. All that remained to compete on was price.

Who could deliver the goods at the lowest price to their customers?

Neither company was doing their own manufacturing, so there were only ever two ways that they could bring down the cost of their goods in any significant way. They could either cut overhead costs or negotiate lower prices from their suppliers.

Both companies were determined to maintain the high quality of their in-store experience and so were very hesitant to touch any of the overhead costs. Not to mention the importance of good people across the organization, which meant that they were not looking to reduce salaries by any stretch of the imagination. Sure, there were some technological advancements that helped, but at the end of the day – they needed to tackle the input costs.

So, that began the race to the bottom.

Woolworths and Coles would go back and forth with suppliers fighting to squeeze margins as best as they could – so that they could pass those savings on to the consumers. Every time that Coles won a slight discount from a supplier, Woolworths would have to fight to match it. Every time Woolworths negotiated better payment terms with a distributor, Coles would scramble to do the same.

The enduring pressure on price started to place a lot of strain on the suppliers that were selling their goods into these chains. But they didn’t really have any bargaining power in these situations because the order volumes were so large that they represented a substantial portion of their overall sales. Having your goods in Woolworths or Coles was not an opportunity that you could easily turn away. And so, piece by piece, these corporations chipped away at the prices and used each other as leverage points along the way.

The War on Milk

The most vivid example of this race to the bottom was the Milk Price Wars. Starting in January of 2011, there began intense competition on milk prices, one of the key staples that any supermarket must be competitive on. Both companies were getting their milk supplies from local Australian farmers, and they continued to push the prices down as far as they could go. At the very bottom, they got all the way to $1 per litre, a price so low that there was barely any money being made at all.

This was great for the consumer, of course, because they didn’t really have any connection with where the milk was coming from – they were just happy to be saving a little bit on their shopping. The farmers were the ones that were hurting.

It wasn’t until the drought in 2019 where we discovered, as a nation, how fragile that industry actually was. The lack of rain placed an immediate strain on many of these farms and because the margins had been so tight for so long, there was no cushion in the system. A substantial number of farmers had been living on the edge and any economic shock was going to topple them over.

This caused an immediate shortage of milk, and it highlighted the potential externalities of these price wars. When you are so determined to lower short-term prices, you trade that off against the long-term stability of the system you’re relying on. And all of a sudden, your supply disappears.

This was the straw that broke the camel’s back [6] and it caused an uproar within Australia. Regulators and advocates for fair competition started to raise their voices and it kickstarted a conversation about the duopoly that continues to this day.

Key Takeaway: Short-term price wars can often have negative long-term effects that you don’t see straight away. Wherever possible, compete on value rather than price – because the incentives are much more productive for you and all your stakeholders.

The Duopoly

The Woolworths – Coles duopoly has caused a lot of controversy in the Australian market because of what it’s done to other players who have tried to enter the space and failed. As we discussed above, both companies used their substantial scale and stature to bring prices down to a level where it is very difficult to compete with, if you don’t have the same infrastructure in place.

A new chain that is just getting started simply can’t get to the same low prices that the two giants can because it is not placing big enough orders and it doesn’t have the brand cache that Woolworths and Coles do. As a result, there is a significant barrier to entry that is impossible to dismantle while Woolworths and Coles control the market [7] .

Now, of course, there are debates on both sides of this and some will say that those complaining are simply not good enough to compete and that this is the nature of the free market. They will back that up by saying that the low prices are benefitting consumers and isn’t that all we’re doing this for anyway?

This line of thinking misses an important nuance though. The reason that we regulate competition as a society is that we want to enable a diversity of choice so that power isn’t centralized in the hands of one or two market players [8] . The moment that corporations get so big that they completely dominate a market, we lose something in terms of being able to inspire the next generation of players to enter that space. And the overall market becomes less robust than we would like it to be.

It’s the milk situation all over again. Are we willing to accept an unstable economic system for the benefit of low prices in the short term? Many say no, but it’s difficult to know how these sorts of things should be regulated, if at all.

What’s clear to see though is that the duopoly may have stunted the growth of the supermarket industry in Australia, not allowing the space for new entrants and further entrenching the existing incumbents in a way that is difficult to turn around.

With that being said, there are some green shoots that point to a potentially positive outcome. Firstly, the public conversation that has developed around the topic will no doubt cause both Woolworths and Coles to carefully consider any new acquisitions that they seek to make. It’s unlikely that they’ll be able to buy smaller players in the way that they’ve done over the years and hopefully, that gives those independent grocers the chance to breathe and grow.

Another aspect is the continued push towards online shopping. The COVID-19 pandemic has accelerated a trend that was happening anyway, and more consumers are buying their groceries online than ever before. This is a brand new business model that allows for new players to compete in ways that they haven’t before. You don’t require huge retail stores or an established brand to capture new customers. The digitization of this process opens up new opportunities that should excite new entrepreneurs and force the incumbents to adapt.

Only time will tell if the duopoly will ever be toppled, but it’s safe to say that the competition between Woolworths and Coles will continue unabated, regardless of what happens on the macro level.

Key Takeaway: Growing too big comes with its own problems and challenges. Be wary of creating monopolies or duopolies which draw the attention of the regulator. Strategic acquisitions should be carefully considered with the wider societal impacts in mind.

The Sentiment of the Australian Public

If you were to poll the average Australian on the street, they probably wouldn’t have any strong feelings on the duopoly because there isn’t a nuanced understanding of exactly how influential these companies are in the general public. Most people simply don’t know how many different brands and companies are owned by Woolworths and Coles.

From a consumer perspective, they are mostly happy because they can get the goods they want, at inexpensive prices, at a place that is convenient for them. This is one of the pernicious aspects of these public goods – no one is aware of the externalities that come with a duopoly like this. And as a result, it can be very difficult to do something about it.

When it comes to comparing the two, this is difficult to get any real data on. Both brands have a loyal base of customers, and they continue to push home their advantage in any way that they can. Currently, Woolworths seems to be a bit stronger than Coles, but this has changed hands numerous times over the years and so it’s not something that we should hang our hat on.

At the end of the day, the Australian retail experience owes a lot to what Woolworths and Coles have done, and they are here to stay – whether we like it or not. By ingratiating themselves into Australian culture and obsessing about delivering a world-class customer experience, they’ve won the battle to become a household supermarket chain.

Key Takeaway: Consumers only really care about themselves. Rational self-interest is something that holds true across most markets and so if you can focus on them – you’ll build a loyal audience.

That brings us to the end of our deep dive into the competition between Woolworths and Coles. This is a story that is not yet over because they continue to battle and innovate against each other to this day, but by looking at where it’s come from you can get a decent sense as to the sorts of strategic moves that are required to grow a company like this.

Let’s recap some of the main takeaways that we discussed:

• You must be constantly adjusting to the macro-economic and cultural shifts that are affecting your customers, or you risk becoming detached and eventually made irrelevant.
• What seems obvious to us now represented a game-changing innovation in the past. What new concept can you bring to life today that will look obvious to us in the future? Is there low-hanging fruit that is right in front of you?
• Venturing out of your vertical doesn’t always work, no matter how strong your brand is. Do so carefully and with the right research and risk mitigation behind you.
• Short-term price wars can often have negative long-term effects that you don’t see straight away. Wherever possible, compete on value rather than price – because the incentives are much more productive for you and all your stakeholders.
• Growing too big comes with its own problems and challenges. Be wary of creating monopolies or duopolies which draw the attention of the regulator. Strategic acquisitions should be carefully considered with the wider societal impacts in mind.
• Consumers only really care about themselves. Rational self-interest is something that holds true across most markets and so if you can focus on them – you’ll build a loyal audience.

Strategically, the way that these two companies have intertwined is fascinating, and it shows just how competition can act as a catalyst for powerful innovation. Having a peer to compare yourself to keeps you honest and keeps you working hard every day to try and outperform.

This is one of the major reasons why duopolies are more interesting than monopolies. When you have one company that dominates a space, they tend to get complacent and they start to take their customers for granted, which opens space for new entrants and disruptors. But when you have two companies battling over time, there is natural accountability that makes for fascinating business outcomes.

We hope that you’ve been able to get some value from this strategy study that you can apply in your own business. The lessons that we can learn from Woolworths and Coles are transferable across all industries and they’re a perfect microcosm of what happens when two heavyweights are going at it in the marketplace.

We wait patiently for the disruptor that will change the game once more, but for now – you’ll have to stick with Woolworths or with Coles.

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Economics (Optional) Notes & Mind Maps

• 1.1 Marshallian and Walrasian Approach to Price determination
• 1.2 Alternative Distribution Theories: Ricardo, Kaldor, Kaleeki

1.3 Markets Structure: Monopolistic Competition, Duopoly, Oligopoly

• 1.4 Modern Welfare Criteria: Pareto Hicks & Scitovsky, Arrow’s Impossibility Theorem, A.K. Sen’s Social Welfare Function

I. Introduction to Market Structures

Definition and characteristics of market structures.

• Market structure : Refers to the organizational and other characteristics of a market, including the number of firms, the nature of the product, the degree of market power, and the ease of entry and exit from the market.
• Perfect competition : Many firms producing identical products, no single firm can influence the market price.
• Monopolistic competition : Many firms producing differentiated products, each firm has some degree of market power.
• Oligopoly : Few firms dominate the market, strategic interactions among firms are significant.
• Monopoly : Single firm dominates the market, significant control over prices.
• Number of sellers : Determines the level of competition.
• Product differentiation : Homogeneous vs. heterogeneous products.
• Barriers to entry and exit : High barriers limit competition.
• Pricing power : Varies across different market structures.

Importance in Advanced Microeconomics

• Perfect competition : Leads to allocative and productive efficiency.
• Monopoly : Can result in allocative inefficiency and higher prices.
• Monopolistic competition : Provides variety but may lead to higher prices.
• Oligopoly : Can lead to collusion and higher prices, reducing consumer welfare.
• Anti-trust laws : Prevent monopolies and promote competition.
• Regulatory bodies : Monitor and regulate market practices to protect consumer interests.
• Game theory : Used to analyze strategic interactions in oligopolistic markets.
• Price wars : Common in oligopolies, affecting market stability.

Historical Context and Evolution of Market Structures

• Adam Smith : Advocated for laissez-faire principles in “The Wealth of Nations” (1776), emphasizing the benefits of competition.
• Karl Marx : Critiqued capitalism and highlighted the exploitative nature of monopolies in “Das Kapital” (1867).
• Game theory : Introduced new insights into strategic behavior in oligopolies.
• Technological advancements : Changed market dynamics, especially in digital markets.
• Liberalization policies in India (1990s) : Transformed the market landscape, increasing competition in various industries.
• Telecommunications industry : Transition from monopoly to oligopoly with the entry of new firms.
• Automobile industry : Example of an oligopoly with few dominant players.
• Sherman Antitrust Act (1890) : First significant U.S. legislation to curb monopolistic practices.
• Competition Commission of India (CCI) : Established in 2003 to prevent anti-competitive practices.

II. Monopolistic Competition

Definition and characteristics.

• Product differentiation : Firms differentiate products through branding, quality, and marketing.
• Many firms : Numerous competitors, each with a small market share.
• Free entry and exit : Low barriers allow firms to enter or exit the market easily.
• Price makers : Firms have some control over pricing due to product differentiation.

Short-Run and Long-Run Equilibrium

• Marginal revenue equals marginal cost : Firms set output where MR = MC to maximize profits.
• Possible outcomes : Firms can earn normal profits, supernormal profits, or incur losses.
• Normal profits : Entry of new firms erodes supernormal profits, leading to zero economic profit.
• Adjustment mechanisms : Market adjusts as firms enter or exit, stabilizing at normal profit levels.

Pricing and Output Determination

• Pricing strategy : Firms set prices based on MR and MC to maximize profits.
• Impact of product differentiation : Differentiation allows firms to charge higher prices.
• Elasticity of demand : High elasticity means consumers are sensitive to price changes.

Comparison with Perfect Competition

Advantages and Disadvantages

• Consumer choice : Wide variety of products due to differentiation.
• Innovation : Firms innovate to stand out, benefiting consumers.
• Inefficiency : Resources may be underutilized, leading to excess capacity.
• Excess capacity : Firms operate below full capacity, leading to inefficiencies.

Case Studies

• Examples : McDonald’s, Burger King.
• Strategies : Branding, pricing, and product diversity to attract customers.
• Examples : Zara, H&M.
• Strategies : Differentiation through fashion trends, quality, and marketing.

III. Duopoly

• Two dominant firms : Control most of the market share.
• Capital : Large financial investment needed.
• Technology : Advanced technology required.
• Distribution networks : Established networks necessary.
• Brand recognition : Strong brand presence needed.
• Economies of scale : Cost advantages from large-scale production.
• Price changes : One firm’s price change affects the other.
• Pricing power : Potential for collusion to set higher prices.
• Innovation : Drives technological advances.
• Product differentiation : Unique features to attract customers.

Models of Duopoly

• Antoine Augustin Cournot : Introduced in 1838.
• Compete on quantity : Firms decide output levels simultaneously.
• Market price : Determined by total quantity produced.
• Homogeneous products : No differentiation.
• No collusion : Independent decision-making.
• Market power : Each firm’s output affects price.
• Fixed number of firms : No entry or exit.
• Strategic behavior : Firms act rationally to maximize profit.
• Reaction functions : Firms adjust output based on competitors.
• Example : Two firms producing mineral water at zero cost.
• Joseph Louis François Bertrand : Formulated in 1883.
• Compete on price : Firms set prices simultaneously.
• Market share : Firm with lower price captures entire market.
• Homogeneous products : Identical goods.
• No capacity constraints : Firms can meet total demand.
• Static game : Single-period decision-making.
• Symmetric marginal cost : Same cost for all firms.
• Price equilibrium : Prices driven down to marginal cost.
• Example : Firms setting prices for identical products.
• Collusion : Firms cooperate to set prices or output.
• Cartel formation : Agreement to maximize joint profits.
• Price fixing : Set prices above competitive levels.
• Market sharing : Divide market to avoid competition.
• Example : OPEC in the oil industry.
• Cournot Model : Adjust output to maximize profit.
• Bertrand Model : Set prices to capture market share.
• Cournot : Intersection of reaction functions.
• Bertrand : Price equals marginal cost.
• Consumer impact : Higher prices, less choice.
• Market stability : Potential for stable prices.

Comparison with Oligopoly and Monopoly

• Innovation : Competition drives technological advances.
• Market stability : Predictable market behavior.
• High-quality products : Firms strive to outdo each other.
• Potential for collusion : Higher prices, reduced consumer welfare.
• Limited consumer choice : Only two firms dominate.
• Market entry barriers : Difficult for new firms to enter.
• Market share : Dominant players in the OS market.
• Innovation : Continuous updates and features.
• Competition : Drives technological advancements.
• Market share : Major players in the aircraft industry.
• Product differentiation : Different models and features.
• Competition : Leads to innovation and efficiency.

IV. Oligopoly

• Few dominant firms : Small number of large firms hold significant market share.
• Regulatory constraints : Legal and regulatory barriers.
• Access to supply chains : Established supply networks.
• Capital demands : Large financial investments required.
• Brand loyalty : Strong consumer preference for established brands.
• Price changes : One firm’s price change impacts others.
• Collusion : Cooperation to control market.
• Cartels : Formal agreements to fix prices.
• Differentiated products : Unique features and branding.

Models of Oligopoly

• Quantity competition : Firms compete by setting output levels.
• Simultaneous decisions : Firms decide output simultaneously.
• Nash Equilibrium : Firms’ best responses intersect.
• Price competition : Firms compete by setting prices.
• Simultaneous decisions : Firms set prices simultaneously.
• Market share : Firm with lower price captures market.
• Nash Equilibrium : Firms cannot profitably undercut each other.
• Heinrich von Stackelberg : Introduced in 1934.
• Leader-follower dynamics : One firm sets output first, others follow.
• Sequential decisions : Firms make decisions in sequence.
• First-mover advantage : Leader firm gains strategic advantage.
• Reaction functions : Followers adjust output based on leader.
• Stackelberg Equilibrium : Leader’s optimal output and followers’ responses.
• Strategic interactions : Firms consider competitors’ actions.
• Prisoner’s dilemma : Firms tempted to cheat on agreements.
• Nash Equilibrium : Optimal strategy given competitors’ actions.
• Kinked demand curve : Explains price stability.

Comparison with Monopolistic Competition and Monopoly

• Potential for anti-competitive practices : Collusion and price-fixing.
• Limited consumer choice : Few firms dominate.
• High barriers to entry : Difficult for new firms to enter.
• OPEC (Organization of the Petroleum Exporting Countries) : Founded in 1960.
• Market control : Member countries control oil production and prices.
• Collusion : Agreement to set production quotas.
• Major airlines : American Airlines, Delta, United, Southwest.
• Market share : Few airlines dominate domestic flights.
• Price competition : Price wars and strategic alliances.

V. Comparative Analysis of Market Structures

Key differences and similarities.

Impact on Economic Welfare

Role of Government Regulation

Criticism of Market Structures

Examples and Case Studies

VI. Advanced Topics in Market Structures

Game theory and strategic behavior.

• Interdependence : Firms’ actions affect each other.
• Strategic decisions : Firms consider competitors’ reactions.
• Examples : Boeing vs. Airbus, Coca-Cola vs. Pepsi.
• Definition : Games played multiple times.
• Strategies : Firms may adopt strategies like tit-for-tat.
• Example : OPEC (Organization of the Petroleum Exporting Countries) founded in 1960.
• Illegal : Most countries prohibit cartels.

Welfare Implications

• Definition : Achieving the highest possible welfare for society.
• Tools : Cost-benefit analysis, social welfare functions.
• Pareto Efficiency : No one can be made better off without making someone else worse off.
• Definition : Too many firms entering a market can reduce overall welfare.
• Implications : Overcrowded markets may lead to inefficiencies.
• Monopoly : High prices, reduced consumer surplus.
• Oligopoly : Potential for collusion, higher prices.
• Monopolistic Competition : Product differentiation, higher prices but more choice.

Technological Change and Market Structures

• Definition : Development of new products or processes.
• Impact : Can disrupt existing markets, create new ones.
• Examples : Digital cameras replacing film, streaming services replacing DVDs.
• Joseph Schumpeter : Introduced the concept.
• Example : Streaming services disrupting DVD sales.
• Apple : Continuous innovation with products like the iPod and iPhone.
• Tesla : Innovations in electric vehicles and autonomous driving.
• Walmart : Digital transformation in supply chain and customer experience.

Global Perspectives

• Developed Economies : Advanced technology, high competition.
• Developing Economies : Emerging markets, growing competition.
• Increased Competition : Firms compete globally.
• Market Integration : Markets become interconnected.
• Trade Policies : Affect market structures and competition.
• Automobile Industry : Global competition between firms like Toyota, Ford, and Tata Motors.
• Telecommunications : Competition between global giants like AT&T, Vodafone, and Reliance Jio.

VII. Conclusion

Summary of key points.

• Characteristics : Many firms, differentiated products, free entry and exit.
• Examples : Retail clothing brands like Zara and H&M.
• Characteristics : Two dominant firms, strategic interactions, price interdependence.
• Characteristics : Few dominant firms, high barriers to entry, potential for collusion.
• Examples : Smartphone operating systems (Apple vs. Google), commercial aircraft (Airbus vs. Boeing).

Comparative Insights

• Perfect Competition : Very large number of sellers.
• Monopoly : Single seller.
• Monopolistic Competition : Large number of sellers.
• Oligopoly : Few big sellers.
• Perfect Competition : Homogeneous products.
• Monopoly : No close substitutes.
• Monopolistic Competition : Differentiated products.
• Oligopoly : Homogeneous or differentiated products.
• Perfect Competition : Freedom of entry and exit.
• Monopoly : Restricted entry and exit.
• Monopolistic Competition : Freedom of entry and exit.
• Oligopoly : Restrictions on entry.
• Perfect Competition : Firms are price takers.
• Monopoly : Firm is a price maker.
• Monopolistic Competition : Partial control over price.
• Oligopoly : Price rigidity due to fear of price war.
• Perfect Competition : High, homogeneous products.
• Monopoly : Very limited, single firm.
• Monopolistic Competition : High, differentiated products.
• Oligopoly : Limited, few firms dominate.

Future Directions

• Examples : Digital transformation in retail, innovations in electric vehicles.
• Examples : Global competition in the automobile industry, telecommunications.
• Impact of Digital Markets : How digital platforms are reshaping traditional market structures.
• Sustainability and Market Structures : Role of market structures in promoting sustainable practices.
• Behavioral Economics : Influence of consumer behavior on market dynamics.

Policy Implications

• Purpose : Prevent monopolies, promote competition.
• Examples : Sherman Antitrust Act (1890) in the U.S., Competition Act (2002) in India.
• Functions : Monitor market practices, enforce regulations.
• Examples : Federal Trade Commission (FTC) in the U.S., Competition Commission of India (CCI) established in 2003.
• Monetary Policies : Influence interest rates, affect borrowing costs.
• Fiscal Policies : Government spending and taxation impact market conditions.
• Subsidies and Tariffs : Support specific industries, protect domestic markets.
• Bailouts : Rescue failing industries, prevent systemic failures.
• Efficiency : Ensuring markets operate efficiently.
• Equity : Addressing income inequality and access to goods and services.
• Examples : Policies to promote fair competition, support for small businesses.
• Analyze the impact of product differentiation on pricing and output determination in monopolistic competition. Discuss how this affects consumer choice and market efficiency. (250 words)
• Compare and contrast the Cournot and Bertrand models of duopoly. How do these models influence firms’ strategic behavior and market outcomes? (250 words)
• Evaluate the role of government regulation in addressing market failures and inefficiencies in oligopolistic markets. What are the potential benefits and drawbacks of such interventions? (250 words)

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Dynamical Study of Competition Cournot-like Duopoly Games Incorporating Fractional Order Derivatives and Seasonal Influences

Cournot’s game is one of the most distinguished and influential economic models. However, the classical integer order derivatives utilized in Cournot’s game lack the efficiency to simulate the significant memory characteristics observed in many economic systems. This work aims at introducing a dynamical study of a more realistic proposed competition Cournot-like duopoly game having fractional order derivatives. Sufficient conditions for existence and uniqueness of the new model’s solution are obtained. The existence and local stability analysis of Nash equilibrium points along with other equilibrium points are examined. Some aspects of global stability analysis are treated. More significantly, the effects of seasonal periodic perturbations of parameters values are also explored. The multiscale fuzzy entropy measurements for complexity are employed for this case. Numerical simulations are presented in order to verify the analytical results. It is observed that the time-varying parameters induce very complicated dynamics in perturbed Cournot duopoly game compared with the unperturbed game.

Acknowledgments

The author would like to extend his sincere appreciation to the Deanship of Scientific Research at King Saud University for funding this Research group No. (RG − 1438-046). The author would like to thanks the anonymous Reviewers for their helpful and useful comments which further improved the paper.

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