8 Oligopoly - Luiscabral.net

Box 8.1. Digital yellow pages: from monopoly to duopoly to oligopoly. 3
In 1987, Nynex began offering in digital form the entire telephone directory for the
area the company then served (New York and New England). With a list price of
$10,000, the CD product was primarily targeted at retailers, government departments
and financial service operators.
Soon after, Jim Bryant, the Nynex executive in charge of developing the new Nynex
product, decided to leave the company and found Pro CD, a company devoted to
publishing white and yellow page directories in electronic form.
Fearing competition, Nynex declined to offer the required data for Pro CD to compile
his listing. Undeterred by this obstacle, Bryant sent physical copies of the directories
to Asia, where he outsourced the task of typing them from scratch (and retyping, to
check for errors). All in all, Pro CD created a mega-directory with more than 70 million
entries.
Facing competition in the market for electronic directories, Nynex was forced to lower
its price. By the early 1990s, sale prices were in the hundreds of dollars, down from the
original $10,000 price tag. Meanwhile, additional entrants joined Pro CD in challenging
Nynex’s initial monopoly. By 2000, a complete directory could be bought for a mere
$20. e
tannica has been, for more than two centuries, a standard reference work. Until the 1990s,
the thirty-two-volume hardback set sold for $1,600. Then Microsoft entered the market
with Encarta, which it sold on CD for less than $100. Britannica responded by issuing its
own CD version as well. By 2000, both Britannica and Encarta were selling for $89.99.
While this is still far from the Bertrand equilibrium (price equal to the cost of the CDs)
it is certainly closer to Bertrand than the initial, monopoly-like price of $1,600. Box 8.1
describes another example of how even one competitor can drive prices down tremendously.
Avoiding the Bertrand trap. There are many real-world markets where the number of
firms is small — two or a few more —, firms compete on price, and still firm profits are
positive — sometimes very large. (Can you think of some?) This seems to contradict
the Bertrand model’s prediction. How can we explain this apparent contradiction between
theory and empirical observation? Put differently: if you consult with a firm competing
in a price-setting duopoly, how do you help your client avoid the Bertrand trap? In what
follows, I consider four different solutions, two which I will develop in later chapters, two of
which I will cover in the remainder of this section.
1. Product differentiation. The Bertrand model assumes that both firms sell the same
product. If instead firms sell differentiated products, then duopoly price competition
does not necessarily drive prices down to marginal cost as predicted by the Bertrand
model. In fact, undercutting the rival does not guarantee that a firm will get total
e. Eventually, Pro CD became the first company to compile all of the published telephone directories
in the United States and Canada. In 1996, it merged with Acxiom, a company that integrates data,
services and technology to create and deliver customer and information management solutions.