We analyze the potential entry of a new product into a vertically differentiated market. Here the entry-deterrence strategies of the incumbent firm rely on “limit qualities.” The model assumes quality-dependent marginal production costs and considers sequential quality choices by an incumbent and an entrant. Entry-quality decisions and the entry-deterrence strategies are related to the fixed cost necessary for entry and to the degree of consumers’ taste for quality. We detail the conditions under which the incumbent increases its quality level to deter entry. Quality-dependent marginal production costs in the model entail the possibility of inferior-quality entry as well. Welfare is not necessarily improved when entry is encouraged rather than deterred.
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Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number
12412.
Length: Date of creation: 14 Sep 2005 Date of revision: Publication status: Published in Review of Industrial Organization, November 2006, Vol. 29, No. 3, pp. 227-52 . Handle: RePEc:isu:genres:12412
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Find related papers by JEL classification: C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games D4 - Microeconomics - - Market Structure and Pricing D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
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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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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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