Vertical Product Differentiation, Entry-Deterrence Strategies, and Entry Qualities

We analyze the entry of a new product into a vertically differentiated market in which an entrant and an incumbent compete in prices. Here the entry-deterrence strategies of the incumbent firm rely on "limit qualities." With a sequential choice of quality, a quality-dependent marginal production cost, and a fixed entry cost, we relate the entry-quality decision and the entry-deterrence strategies to the level of entry cost and the degree of consumer heterogeneity. Quality-dependent marginal production costs in the model entail the possibility of inferior-quality entry as well as an incumbent's aggressive entry-deterrence strategies of increasing its quality level toward potential entry. Welfare evaluation confirms that social welfare is not necessarily improved when entry is encouraged rather than deterred.


Issue Date:
2006
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/18410
Total Pages:
32
Note:
Replaced with revised version of paper 10/06/06.
Series Statement:
CARD Working Paper 05-WP 403 (revised)




 Record created 2017-04-01, last modified 2017-12-28

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