Industrial Organization: Contemporary Theory and Empirical Applications, 5th Edition

10

Oligopolistic Price Competition

In 2007, Amazon introduced its first Kindle e-reader at a price of $399. The product was a quick success. However, in the face of an announcement by Barnes & Noble that it would soon launch its own Nook e-reader, the price was reduced in 2008 to $259. In 2009, when the Nook was launched, the competition intensified and Amazon dropped the price to $199. In March of 2010, Apple began taking orders for its new iPad product, which also included e-reading capabilities. As this text is being written, both the Kindle Touch and the Nook Simple Touch are selling for $99, while the latest top-of-the-line Kindle Fire that also serves as a viewer and game platform is being offered at a sale price of $139. This rapid fall of e-reader prices has been all the more remarkable in that it has been accompanied by an almost equally rapid rise in their quality. Relative to the initial products, the current Kindle and Nook are more than 50 percent lighter, have a battery life more than twice as long, and a storage capacity as much as 100 times greater.

The digital and mobile technology markets are similar to many markets, including restaurants, electricians, moving companies, consulting firms, and financial services, in which consumers favor those products that best match their preferences at the lowest price. In these markets, it is in fact the firm's price choice that largely determines its demand and its profit, and each firm may set a different price. While this ...