To present causes general notation getting easier source, we get, (3) S l a-b e l ? S an excellent l t age roentgen ? step one step three ( dos t c t + t f t ) step one ? step one step 3 dos t c t + t f t t c t + t f t ? F (3)

The main difference between the full wide range transfers in phase is the old-fashioned company’s relocate to a-c t = 1 , implying market express of one to have Feet products in the newest labels phase. In the labels stage, each other enterprises also have Ft circumstances on Base product’s cost of the alternative phase 1 step three ( 2 t c t + t f t ) , the original part of the formula. The difference inside money transfers hence wide variety to help you an evaluation away from market offers out of Legs things between the two stages, that’s 1 ? 1 3 dos t c t + t f t t c t + t f t > 0, the next part within the (3). However, which positive effectation of improved business towards money transmits should be as compared to extra repaired prices F upcoming with each other whenever a few firms promote Legs items. It inefficiency in the market cannot be prevented until each other firms do be one. Including a dominance position create however cause other inefficiencies. Note that (3) gets t / 2 ? F ? 0 to have symmetrical mental length will set you back, implying that in case firms’ earnings is positive, money transmits increase whenever swinging in the alternative phase into the labeling phase.

Jaffee and Howard 2010 )

On top of that, i compare the difference inside money transfers for every single firm, leading to the fresh dialogue of your dilution from Ft (elizabeth.g. Create Feet agencies in fact bring smaller money transmits if the battle gets more significant about Ft market? Contrasting S f t a good l t elizabeth r and S f t l a b elizabeth l , i derive: (4) S f t an excellent l t e roentgen ? S f t l a-b elizabeth l ? t c t ? t f t (4)

This is exactly along with apparent into the (3)

The intuition behind (4) is as follows. As soon as t c t > t f t the FT firm’s market share in the alternative phase is larger than FT’s market share of 1 / 2 in the labeling phase. The higher the consumers’ psychological fairness costs regarding the conventional product, the more attractive the FT product becomes for consumers. The higher market share results in larger profits for the FT firm, making S f t a l t e r larger in comparison to wealth transfers in the labeling phase. Likewise, when t c t < t f t , the FT firm's market share in the alternative phase is smaller than in the FT labeling phase, resulting in lower wealth transfers in the alternative phase. For the conventional firm these considerations do not matter: as it generated zero wealth transfers in the alternative phase, it obviously transfers more in the labeling phase.

Also, the effect on average wealth transfers, the wealth transfers per product sold, add to the discussion on dilution. The conventional firm’s wealth transfers per product sold increase, while for the FT firm we find s ? f t a l t e r ? s ? f t l a b e l ? t c t ? t f t , due to the interplay of fixed costs and FT market shares. As in the alternative phase, the FT firm’s market share is larger (smaller) when t c t > ( < ) t f t , F is spread over more (less) products and average wealth transfers increase (decrease) for the FT firm. As FT market shares were relatively small, it is likely that the labeling phase thus results in higher average wealth transfers for the FT firm. Furthermore, it indicates a more efficient provision of wealth transfers by the FT firm.