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Entry and exit in a vertically differentiated industry

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  • Silviano Esteve-Pérez

    ()
    (University of Valencia)

Abstract

This paper presents a duopoly model of firm rivalry in a vertically differentiated industry when market dynamics is explicitly accounted for. It shows how the interplay between demand (degree of product differentiation, demand elasticity) and cost (fixed and quality costs) factors determine firms' relative strength when quality is irreversible. The main strategic choices are product quality, price and the timing of entry and exit. Further, firms incur sunk quality costs at time of entry and operating fixed costs of maintaining quality. Although the low quality firm may outlast its rival in the declining phase, both firms wish to be the "quality leader".

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File URL: ftp://147.156.210.157/RePEc/pdf/eec_1107.pdf
File Function: First version, 2011
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Bibliographic Info

Paper provided by Department of Applied Economics II, Universidad de Valencia in its series Working Papers with number 1107.

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Length: 35 pages
Date of creation: Mar 2011
Date of revision:
Handle: RePEc:eec:wpaper:1107

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Keywords: Entry; Exit; Vertical product differentiation;

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  1. Esteve-Perez, Silviano, 2005. "Exit with vertical product differentiation," International Journal of Industrial Organization, Elsevier, vol. 23(3-4), pages 227-247, April.
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