Vertical Product Differentiation, Market Entry, and Welfare
AbstractThis paper analyses a model of vertical product differentiation with one incumbent and one entrant firm. It is shown that if firms can produce only one quality level welfare in this entry game can be lower than in monopoly. This is the case if qualities are strategic complements because the incumbent may distort its quality downwards. If firms can produce a quality range and practice non-linear pricing welfare in case of entry deterrence is higher than in monopoly because the incumbent enlarges its product line. If entry is accommodated consumer rent increases but the consequences on welfare are ambiguous.
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Bibliographic InfoPaper provided by University of Munich, Department of Economics in its series Discussion Papers in Economics with number 479.
Date of creation: Dec 2004
Date of revision:
Entry Deterrence ; Price Discrimination ; Vertical Differentiation;
Find related papers by JEL classification:
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology
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