L10 - Market Structure, Firm Strategy, and Market Performance: GeneralReturn

This paper establishes a two-stage Hotelling model to identify the implications of the upgrades of durable goods produced by a spatial monopoly. The major findings indicate that, due to the positive effects on profits of the upgrading of products, the monopoly has the motivation to launch upgraded versions with high quality instead of solely producing products with low quality. The monopoly, meanwhile, would not make a commitment to either the high-quality products or the low-quality ones. In addition, the price of the low-quality products decreases as upgraded ones appear on the market in a second stage, since no consumers would store the low-quality products for future consumption.

In the present paper, we develop a monopoly model of vertical product differentiation for analysing the monopolist's decision about the possibility of versioning goods as substitutes or complements when consumers can buy them simultaneously. In this context, we find that versioning goods as substitutes or complements is optimal for the monopolist if the cost of designing the bundle (the purchase of one unit of each version) is increasing, which implies that making variants of closer substitutes reduces costs. However, if making variants of closer substitutes is costly, the monopolist versions goods as complements only. The final result also depends on the degree of concavity and convexity of the cost function.

The paper is concerned with the impact of market research prior to integration with European Union (EU) on the structures of noncompetitive industries in integrated economy. The analysis focuses on monopolistic markets with stochastic demand. Firms are considered in dynamic multiperiod model, where intertemporal links are determined by expenditures on market research in a present period and benefits from this activity (i.e., smaller variance of the prediction error) in the future. We show that the optimal market research strategy is stationary and depends on market size. Consequently, after accession firms operating prior to integration in small markets are expected to have much less information about the total market than their competitors from the EU. This informational asymmetry may affect the structure of the industry in integrated economy. In the extreme case, the firm operating before integration in the small market can be ruled out from the integrated market.