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Market Structure and the Pricing of New Products: A Nested Logit Approach with Asymmetric Firms

Author

Listed:
  • Sylvia Bleker

    (VU University Amsterdam, the Netherlands)

  • Christiaan Behrens

    (VU University Amsterdam, the Netherlands)

  • Paul Koster

    (VU University Amsterdam, the Netherlands)

  • Erik T. Verhoef

    (VU University Amsterdam, the Netherlands)

Abstract
This article investigates competition in a market with an emerging technology using a discrete choice model to analyze demand and welfare. We focus on industry structure and investigate the impact of different market structures on demand for the new technology and on welfare. The car market serves as a prime example of such a market, where electric vehicles (EV’s) represent the new technology competing with standard cars with internal combustion engines (ICV’s). To analyze such a market, we use a nested logit model. In contrast to earlier literature, we allow firms to be asymmetric and active in multiple nests, with different numbers of variants in each nest, which can add up to any market share. Additionally, we add to existing literature by considering the case where substitutability between firms is stronger than between technologies, by nesting products by technology instead of by firm. We find implicit analytical solutions for the equilibrium mark-ups which can be used when there are two nests in the market; within that restriction firms can be asymmetric. Numerically, we find that EV sales are higher if offered by a new entrant only selling EV’s as opposed to when it is supplied by a firm selling variants of both types. We present an index based on mark-up differences between variants in the market, which can be used to a priori determine whether a change in market structure would increase or decrease welfare. These results are general to the nested logit model, and the index can thus be used in any market, as long as the market is sufficiently accurately described by the nested logit model.

Suggested Citation

  • Sylvia Bleker & Christiaan Behrens & Paul Koster & Erik T. Verhoef, 2014. "Market Structure and the Pricing of New Products: A Nested Logit Approach with Asymmetric Firms," Tinbergen Institute Discussion Papers 14-142/VIII, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20140142
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    File URL: https://papers.tinbergen.nl/14142.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Nested logit model; asymmetry; market structure; welfare indices; emerging technology;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D60 - Microeconomics - - Welfare Economics - - - General
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L91 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Transportation: General

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