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Product Diversification, Entry Prevention and Limit Pricing

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  • Takashi Omori
  • George Yarrow

Abstract

This article considers a multiproduct market in which an established firm faces an unlimited number of potential competitors, and all firms have identical cost functions exhibiting scale economies. It is shown that, if von Stackelberg leadership is feasible, the established firm's profit-maximizing strategy will always involve entry deterrence. The characteristics of alternative entry deterring policies are outlined. For a two-good model, it is argued that product diversification is a feature of optimal strategies when substitutability in demand between the goods is relatively low. This will (will not) be coupled with limit pricing when fixed costs are low (high).

Suggested Citation

  • Takashi Omori & George Yarrow, 1982. "Product Diversification, Entry Prevention and Limit Pricing," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 242-248, Spring.
    • Handle: RePEc:rje:bellje:v:13:y:1982:i:spring:p:242-248
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    Cited by:

    1. Nie, Jiajia & Zhong, Ling & Li, Gendao & Cao, Kuo, 2022. "Piracy as an entry deterrence strategy in software market," European Journal of Operational Research, Elsevier, vol. 298(2), pages 560-572.
    2. Meng, Dawen & Tian, Guoqiang, 2013. "Entry-Deterring Nonlinear Pricing with Bounded Rationality," MPRA Paper 57935, University Library of Munich, Germany, revised May 2014.
    3. Müller, Stephan & Götz, Georg, 2014. "Quality competition and entry deterrence: When to launch an extra brand," University of Göttingen Working Papers in Economics 223, University of Goettingen, Department of Economics.
    4. Peter-J. Jost, 2023. "Price commitment and the strategic launch of a fighter brand," Quantitative Marketing and Economics (QME), Springer, vol. 21(3), pages 381-435, September.
    5. Felix Marcos, 1993. "Tax analysis in a limit pricing model," Documentos de Trabajo del ICAE 9304, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.

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