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Profitable Entry into an Unprofitable Market

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  • Ahmad Reza Saboori Memar

    ()
    (University of Giessen)

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    Abstract

    This paper shows how market entry into an unprofitable market can be profitable for a firm. A firm's expansion into a new market can have a beneficial feedback effect for that firm in its “old market”. By entering into a new market, the firm increases its produced quantity and has higher incentives to invest in process R&D. This is a credible signal to the competitors that the firm will be more aggressive in its R&D investments. This weakens the competitors since they scare off and invest less in process R&D. This feedback effect of expanding in foreign markets increases the profits of the expanding firm in its “old market” and if this profit gain exceeds the losses through market entry, then the market entry is profitable for the firm. I also consider how the results change under Bertrand vs Cournot regime and how results change if price discrimination is possible or not. Beside that I show how higher R&D costs or lower demand in a market can lead to lower profits of one firm, but higher profits of the other firm.

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    File URL: http://www.uni-marburg.de/fb02/makro/forschung/magkspapers/06-2013_memar.pdf
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    Bibliographic Info

    Paper provided by Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) in its series MAGKS Papers on Economics with number 201306.

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    Length: 30 pages
    Date of creation: 2013
    Date of revision:
    Publication status: Forthcoming in
    Handle: RePEc:mar:magkse:201306

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    Related research

    Keywords: research and development; price discrimination; product differentiation; process innovation; interbrand competition; strategic commitment; separated markets;

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    13. Vives, Xavier, 1985. "On the efficiency of Bertrand and Cournot equilibria with product differentation," Journal of Economic Theory, Elsevier, vol. 36(1), pages 166-175, June.
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