Abstract
Consider a duopolistic market in which consumers are not necessarily aware of the firms' existence. The market is characterized by the existence of four segments: a duopolistic segment which consists of consumers who are aware of both firms, a segment of consumers who are unaware of either firm and two captive market segments. We assume that by advertising, firms control the proportion of consumers who are aware of their existence. The relative sizes of the four segments affect the equilibrium of the duopolistic pricing game. We show that being large may be disadvantageous, and that even if gaining awareness is costless firms may wish to remain small.
Similar content being viewed by others
References
Brander, J. and B. Spencer (1983), ‘Strategic Commitment with R&D: The Symmetric Case’,Bell Journal of Economics,14, 225–235.
Bulow, J., J. Geanakoplos and P. Klemperer (1985), ‘Multimarket Oligopoly: Strategic Substitutes and Complements’,Journal of Political Economy,93, 388–411.
Calvo, Guillermo, A. and Stanislav Wellisz (1978), ‘Supervision, Loss of Control and the Optimum Firm Size’,Journal of Political Economy,88, 942–53.
Coase, Ronald, H. (1973), ‘The Nature of the Firm’,Economica 386–405.
Dixit, A. (1979), ‘A Model of Duopoly Suggesting a Theory of Entry Barriers’,Bell Journal of Economics,10, 20–32.
Farrell, J. and C. Shapiro (1988), ‘Dynamic Competition with Switching Costs’,The Rand Journal of Economics,19, 123–137.
Fershtman, C. and K. Judd (1987), ‘Incentive Equilibrium in Oligopoly’,American Economic Review 927–940.
Fudenberg, D. and J. Tirole (1984), ‘The Fat-Cat Effect, the Puppy-Dog Play and the Lean and Hungry Look’,AEA Papers and Proceedings 361–366.
Geanakoplos, John and Paul Milgrom (1985), ‘A Theory of Hierarchies Based on Limited Managerial Attention’, mimeo.
Green, J. and S. Scotchmer (1986), ‘Bertrand Competition with a Distribution of Switch Costs and Reservation Prices’, mimeo, Harvard University.
Kaldor, N. (1934), ‘The Equilibrium of the Firm’,Economic Journal,44, 60–76.
Klemperer, P. (1987), ‘Markets with Consumers Switching Costs’,Quarterly Journal of Economics,102, 325–394.
Kotler, P. (1988),Marketing Management, Prentice Hall.
McAfee, R. Preston and John McMillan (1990), ‘Organization Diseconomies of Scale’, mimeo.
Milgrom, Paul R. (1988), ‘Employment Contracts, Influence Activities, and Efficient Organization Design’,Journal of Political Economy,96, 42–60.
Milgrom, Paul R. and J. Roberts (1988), ‘An Economic Approach to Influence Activities in Organization’,American Journal of Sociology,94(Supp.), S154-S179.
Rotemberg, J. and G. Saloner (1991), ‘Benefit of Narrow Business Strategy’, Working Paper.
Shapiro, C. (1989), ‘Theories of Oligopoly Behavior’, in R. Schmalensee and R. D. Willig (eds.),Handbook on Industrial Organization, forthcoming.
Sklivas, S. D. (1982), ‘The Strategic Choice of Managerial Incentives’,Rand Journal of Economics,18, 452–458.
Spence, A. M. (1977), ‘Entry, Capacity, Investment and Oligopolistic Pricing’,Bell Journal of Economics,8, 535–44.
Tirole, J. (1988),The Theory of Industrial Organization, M.I.T. Press.
Vickers, J. (1985), ‘Delegation and the Theory of the Firm’,Economic Journal,95, 138–427.
von Weizacker, C. C. (1984), ‘The Cost of Substitution’,Econometrica 52, 1085–1116.
Williamson, O. E. (1967), ‘Hierarchical Control and Optimum Firm Size’,Journal of Political Economy,75, 123–38.
Author information
Authors and Affiliations
Additional information
We would like to thank Paul Klemperer and an anonymous referee for valuable comments.
Rights and permissions
About this article
Cite this article
Fershtman, C., Muller, E. The benefits of being small: Duopolistic competition with market segmentation. Rev Ind Organ 8, 101–111 (1993). https://doi.org/10.1007/BF01029772
Issue Date:
DOI: https://doi.org/10.1007/BF01029772