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| Author: | Bagwell, K. Ramey, G. Spulber, D. F. |
| Title: | Dynamic retail price and investment competition |
| Journal: | RAND Journal of Economics
1997 : SUMMER, VOL. 28:2, p. 207-227 |
| Index terms: | RETAIL PRICING INVESTMENT COMPETITION DYNAMIC MODELS |
| Language: | eng |
| Abstract: | This study develops a model of retail competition in which retailers select prices and investments in cost reduction. The study constructs an equilibrium in which several identical companies enter and then engage in a phase of vigorous price competition. This phase is concluded with a "shakeout", as a low-price, low-cost company comes to dominate the market. That low prices are complementary with large investments in cost reduction is a central feature of the equilibrium. It is argued that an interpretation of predatory pricing may be inappropriate, even though the dominant company's price rises through time and initially may be below marginal cost. |
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