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Entry and Vertical Differentiation

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Abstract

This paper analyzes the entry of new products into vertically differentiated markets where an entrant and an incumbent compete in quantities. The value of the new product is initially uncertain and new information is generated through purchases in the market. We derive the (unique) Markov perfect equilibrium of the infinite horizon game under the strong long run average payoff criterion. The qualitative features of the optimal entry strategy are shown to depend exclusively on the relative ranking of established and new products based on current beliefs. Superior products are launched relatively slowly and at high initial prices whereas substitutes for existing products are launched aggressively at low initial prices. The robustness of these results with respect to different model specifications is discussed. Classification-JEL: C72, C73, D43, D83 Keywords: Entry, Duopoly, Quantity Competition, Vertical Differentiation, Bayesian Learning,Markov Perfect Equilibrium, Experimentation, Experience Goods

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Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1302.

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Length: 41 pages
Date of creation: May 2001
Date of revision:
Publication status: Published in Journal of Economic Theory (2002), 106(1): 91-125
Handle: RePEc:cwl:cwldpp:1302

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Cited by:
  1. Tamini, Lota D., 2012. "Optimal quality choice under uncertainty on market development," MPRA Paper 40845, University Library of Munich, Germany.
  2. Axel Anderson & Luís M. B. Cabral, 2007. "Go for broke or play it safe? Dynamic competition with choice of variance," RAND Journal of Economics, RAND Corporation, vol. 38(3), pages 593-609, 09.
  3. Krähmer, Daniel, 2002. "Entry and experimentation in oligopolistic markets for experience goods," Discussion Papers, Research Unit: Market Processes and Governance FS IV 02-13, Social Science Research Center Berlin (WZB).
  4. Hoppe, Heidrun C. & Lehmann-Grube, Ulrich, 2005. "Innovation timing games: a general framework with applications," Journal of Economic Theory, Elsevier, vol. 121(1), pages 30-50, March.
  5. Alfranca, Oscar & Lemarie, Stephane, 2003. "Analysing Competition Between Seed Varieties: An Application To Hybrid Corn Seed In France," 2003 Annual meeting, July 27-30, Montreal, Canada 22238, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  6. Krahmer, Daniel, 2003. "Entry and experimentation in oligopolistic markets for experience goods," International Journal of Industrial Organization, Elsevier, vol. 21(8), pages 1201-1213, October.

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