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Price Competition with a Stake in your Rival

Hervas-Drane, A. & Shelegia, S. (2022). Price Competition with a Stake in your Rival. International Journal of Industrial Organization, 102862. doi: 10.1016/j.ijindorg.2022.102862


We examine how revenue-sharing and profit-sharing stakes affect price competition intensity under duopoly. Our analysis builds on the price competition framework introduced by Varian (1980) and accounts for fundamental asymmetries in terms of cost and consumer loyalty. A stake exists when a firm appropriates a share of its rival’s revenues or profits. For example, a marketplace owner that charges a third-party seller an ad valorem fee on its sales has a revenue-sharing stake, and a firm holding a minority ownership participation in another has a profit-sharing stake. We show that a revenue-sharing stake always has a stronger competition-dampening effect (leads to higher prices) than a profit-sharing stake, and explain how the introduction of a stake affects the intensity of competition between firms. Our analysis generates new insight into how stakes affect competitive interaction in the marketplace.

Publication Type: Article
Additional Information: © 2022. This manuscript version is made available under the CC-BY-NC-ND 4.0 license
Publisher Keywords: Revenue-sharing, Ad valorem fees, Profit-sharing, Cross-ownership, Price dispersion
Subjects: H Social Sciences > HB Economic Theory
Departments: Bayes Business School > Management
[img] Text - Accepted Version
This document is not freely accessible until 8 July 2024 due to copyright restrictions.
Available under License Creative Commons Attribution Non-commercial No Derivatives.

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