This study shows that preemptive investment in product proliferation is subject to a commitment problem that is not constrained to models of horizontal product differentiation, but applies to vertical product differentiation settings as well. We investigate the incentives of firms producing high- or low-quality goods that decide simultaneously to introduce new products in different quality areas. In addition, we analyse whether these firms keep or withdraw similar existing products from the market. The study shows that the introduction of new products depends on the credibility of firms' innovation strategies. The high-quality firm's strategy to proliferate the product space in order to deter the low-quality firm from introducing a new product is not credible. Innovators always withdraw their existing products from the market in order to reduce price competition or to avoid cannibalizing demand for their own products.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
4089.
Ralph Siebert, 1999.
"Credible Vertical Preemption,"
CIG Working Papers
FS IV 99-20, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG), revised Jul 2003.
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Find related papers by JEL classification: L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets O31 - Economic Development, Technological Change, and Growth - - Technological Change - - - Innovation and Invention: Processes and Incentives O32 - Economic Development, Technological Change, and Growth - - Technological Change - - - Management of Technological Innovation and R&D
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Kenneth L. Judd, 1983.
"Credible Spatial Preemption,"
Discussion Papers
577, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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