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The Existence of Low-End Firms May Help High-End Firms

Faculty of Economics, Aoyama Gakuin University, 4-4-25 Shibuya, Shibuya-ku, Tokyo 150-8366 Japan
Graduate School of Business Administration, Kobe University, 2-1 Rokkodai, Nada, Kobe, Hyogo 657-8501, Japan
ishibashi{at}econ.aoyama.ac.jp
nmatsush{at}kobe-u.ac.jp

Two models of competition between high-end and low-end products benefiting the high-end firms are presented. One is a quantity competition model, and the other is a price competition model with product differentiation. The key factor is the existence of two heterogeneous consumer groups: those who demand only high-end (name-brand) products and those who care little whether products are high or low end. We show that, under certain conditions, the profits of firms in the high-end market are larger when there are firms producing low-end products than when there are not. The existence of price-sensitive consumers who care little about product quality intensifies competition among the high-end firms. The existence of low-end firms functions as a credible threat, which induces the high-end firms not to overproduce because price-sensitive consumers buy products from the low-end firms. The result provides a new theoretical mechanism concerning the profitability and pricing of national brand firms after the entry of private labels. It has an implication for pricing and marketing strategies: Established firms should not decrease their prices after the entry of nonestablished firms.

Key Words: marketing strategy; pricing research; product positioning; game theory
History: Received: April 27, 2007; accepted: January 10, 2008.