Nonlinear pricing and asymmetric duopoly

We characterise, for both separate and interdependent markets, the local pure-strategies Nash equilibrium of a spatial duopoly game, where consumers are horizontally and vertically heterogeneous, and firms have different cost structures and ranges of product lines. We show that standard results which emerged in the monopoly context can not be generalised to strategic contexts where firms retain market power and there is sufficient competitive pressure. We prove that in the asymmetric duopoly case, when markets are interdependent, the incentive compatibility constraints are slack, and there is no quality distortion.