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Inter-group competition through joint marketing efforts and intra-group Cournot competition

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Abstract

In service industries such as the tourism industry, each firm in a given market faces intra-market competition in relation to quantity setting as well as inter-market competition regarding promotional activity. This study investigates whether collusion in relation to quantity setting and/or promotional activity in these markets is simultaneously beneficial for each firm. In particular, it examines the following four cases: double collusion, single collusion in relation to promotion, single collusion in relation to quantity setting, and competition. We demonstrate that double collusion does not always generate the largest profit for each firm, and that competition may generate the largest profit, which is contrary to conventional wisdom. Moreover, competition is always socially desirable. The novel contribution of this study is the analysis of what happens in terms of each firm’s collusive promotional activities, demonstrating that collusive promotional activities bring about overpromotion that reduces a firm’s profit. Furthermore, single collusion in relation to quantity setting competition results in overpromotion and a reduction in the firm’s profit. Thus, our main contribution is to illustrate the inefficiency of these collusion mechanisms.

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Notes

  1. See the Introduction to Chapter 6.

  2. The firms in one group do not compete directly with the firms in the other group when they sell a product.

  3. It should be noted that although Kurokawa is located near Hitoyoshi, the two towns do not engage in cooperative promotional activity.

  4. Among other examples, joint marketing takes place in relation to physical goods. Another example of such cooperation is US farms that promote their pork and milk through joint advertising. We thank one of the referees for this suggestion.

  5. See Wang and Krakover (2008), Miocic et al. (2016), Fyall et al. (2012), and the reference lists cited therein regarding the DMO.

  6. They do not analyze the probability of collusion across regions.

  7. Note that “collusion” means that firms within the market cooperatively determine their production quantity (or promotional expenditure).

  8. Because collusion across groups is unrealistic, it is not considered in this study. If collusion across groups occurs, promotional expenditure in each market becomes zero, and thus the profit of the firms within each market is the largest in our model.

  9. There is no direct competition between markets at this stage.

  10. This study only addresses the symmetric strategy. Here, if each group selects its collusion strategy given the other group’s collusion strategy, double collusion brings about the highest profits among the four cases. Therefore, this study can be interpreted as examining whether double collusion creates a prisoners’ dilemma.

  11. Simbanegavi (2009) uses the term “semi-collusion” to mean single collusion, and thus we use these terms interchangeably throughout this study.

  12. The study of group rent-seeking relates to inter-market conflict. Therefore, when addressing activities aimed at attracting consumers, the market rent-seeking problem is related to the collusion problem. For example, Alexeev and Leitzel (1991) examine the conditions under which collusion improves profits in some situations (e.g., anticipated collusion and secret collusion), while Cheikbossian (2008) discusses the difference between cooperation and competition in terms of effort levels. Furthermore, Ursprung (2012) demonstrates that cooperation in relation to rent-seeking activities does not occur in equilibrium. Among others, Huck et al. (2001) consider the problem of contests, and Huck et al. (2002) examine the collusion problem in the framework of contests.

  13. We have omitted most of the proofs of the propositions and lemmas, which are available upon request.

  14. Among others, Dewenter et al. (2011) examine the effects of collusion in a newspaper market and demonstrate that semi-collusion in relation to advertising leads to less advertising, which lowers copy prices.

  15. Steen and Sørgard (2009) provide a detailed survey of the semi-collusion problem.

  16. We assume that the number of firms in each market is exogenously given. This assumption can be justified by assuming either that the fixed entry cost is very high or that we are considering a short-run problem.

  17. Even if we consider a market with product differentiation, our main result does not change.

  18. It seems reasonable that promotional expenditure increases the total number of consumers in the vein of Krishnamurthy (2000). However, Gasmi et al. (1992), for example, empirically show that cola advertising does not expand the total market (see also Perloff 2018 p. 499), which justifies our assumption. In addition, even if we assume that this promotional activity slightly increases overall demand, our main result still holds. Hattori and Yoshikawa (2016) overcome this problem by assuming that investment in common property resources expands total demand (or the market).

  19. Although this assumption may be problematic, some studies argue that non-price advertising lowers a consumer’s price sensitivity. See Kaul and Wittink (1995), who undertook a detailed survey. Uysal et al. (2000) and Milenkovska et al. (2015) argue that it is important to attract travelers to tourism destinations through non-price promotional activities. Vanhove (2018) notes that since the beginning of the 1990s, many other variables in addition to comparative advantage and price have helped to determine the competitiveness of a tourism enterprise or destination.

  20. That is, a consumer’s choice depends on the two markets’ respective levels of promotional activities. Hence, the market with the higher promotional expenditure attracts more consumers.

  21. Even if the impact of advertising expenditure is marginally decreasing, our results hold.

  22. This argument holds in the following three cases.

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Acknowledgements

The authors would like to thank the editor and three anonymous referees for their constructive and helpful comments. An earlier version of this paper was presented at the 2013 spring meeting of the Japanese Association of Applied Economics (Ritsumeikan University) and the 2013 spring meeting of the Japanese Economic Association (Toyama University). We sincerely thank Toshihiro Matsumura (University of Tokyo), Hiroshi Kitamura (Kyoto-Sangyou University), and Noriaki Matsushima (Osaka University). We thank Geoff Whyte, MBA, from Edanz Group (www.edanzediting.com/ac) for editing a draft of this manuscript. The authors gratefully acknowledge financial support in the form of Grants-in-Aid from the Ministry of Education, Culture, Sports, and Technology (Nos. 25245042, 26380340, 17K03734, and 18K01613).

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Authors and Affiliations

  1. Faculty of Economics, Oita University, 700 Dannoharu, Oita, Japan

    Akio Kawasaki

  2. Takao Ohkawa Faculty of Economics, Ritsumeikan University, 1-1-1 Noji-Higashi, Kusatsu, Shiga, 525-8577, Japan

    Takao Ohkawa

  3. Makoto Okamura Economics Department, Gakushuin University, 1-5-1 Mejiro, Toshima-ku, Tokyo, 171-8588, Japan

    Makoto Okamura

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  1. Akio Kawasaki
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Kawasaki, A., Ohkawa, T. & Okamura, M. Inter-group competition through joint marketing efforts and intra-group Cournot competition. J Econ 128, 203–224 (2019). https://doi.org/10.1007/s00712-019-00654-y

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