Vertical Product Differentiation and Entry Deterrence
AbstractThis paper studies how the existence of a potential entrant influences an incumbent’s choice of quality in a model of vertical product differentiation and entry. Both firms face fixed set-up costs and quality-dependent costs of production, and compete on quality and price. With identical quality-dependent costs, the incumbent will always deter entry if possible, i.e. if fixed costs are high. Quality will be set at a level lower than the optimal quality set if entry was accommodated. If entry is not blockaded, quality will be set at a level strictly lower than the optimal quality set under monopoly.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1455.
Date of creation: Aug 1996
Date of revision:
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Other versions of this item:
- Stefan Lutz, 1997. "Vertical product differentiation and entry deterrence," Journal of Economics, Springer, vol. 65(1), pages 79-102, February.
- L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
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