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Entry, Pricing and Product Design in an Initially Monopolized Market

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Author Info
Steven J. Davis
Kevin M. Murphy
Robert H. Topel

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Abstract

We analyze entry, pricing and product design in a model with differentiated products. Under plausible conditions, entry into an initially monopolized market leads to higher prices for some, possibly all, consumers. Entry can induce a misallocation of goods to consumers, segment the market in a way that transfers surplus to producers and undermine aggressive pricing by the incumbent. Post entry, firms have strong incentives to modify product designs so as to raise price by strengthening market segmentation. Firms may also forego socially beneficial product improvements in the post-entry equilibrium, because they intensify price competition too much. Multi-product monopoly can lead to better design incentives than the non-cooperative pricing that prevails under competition.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8547.

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Date of creation: Oct 2001
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Handle: RePEc:nbr:nberwo:8547

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Find related papers by JEL classification:
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Raymond J. Deneckere & R. Preston McAfee, 1996. "Damaged Goods," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 5(2), pages 149-174, 06. [Downloadable!] (restricted)
  2. Richard G. Frank & David S. Salkever, 1997. "Generic Entry and the Pricing of Pharmaceuticals," NBER Working Papers 5306, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August. [Downloadable!] (restricted)
  4. Richard G. Frank & David S. Salkever, 1997. "Generic Entry and the Pricing of Pharmaceuticals," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 6(1), pages 75-90, 03. [Downloadable!] (restricted)
  5. d'Aspremont, C & Gabszewicz, Jean Jaskold & Thisse, J-F, 1979. "On Hotelling's "Stability in Competition"," Econometrica, Econometric Society, vol. 47(5), pages 1145-50, September. [Downloadable!] (restricted)
  6. Steven J. Davis & Jack MacCrisken & Kevin M. Murphy, 2001. "Economic Perspectives on Software Design: PC Operating Systems and Platforms," NBER Working Papers 8411, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Bresnahan, Timothy F & Reiss, Peter C, 1990. "Entry in Monopoly Markets," Review of Economic Studies, Blackwell Publishing, vol. 57(4), pages 531-53, October. [Downloadable!] (restricted)
  8. Economides, Nicholas, 1986. "Minimal and maximal product differentiation in Hotelling's duopoly," Economics Letters, Elsevier, vol. 21(1), pages 67-71. [Downloadable!] (restricted)
  9. Eaton, B Curtis & Lipsey, Richard G, 1979. "The Theory of Market Pre-emption: The Persistence of Excess Capacity and Monopoly in Growing Spatial Markets," Economica, London School of Economics and Political Science, vol. 46(182), pages 149-58, May. [Downloadable!] (restricted)
  10. Perloff, Jeffrey M. & Suslow, Valerie Y. & Seguin, Paul J., 1996. "Higher prices from entry : pricing of brand-name drugs," CUDARE Working Paper Series 778, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy. [Downloadable!]
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  11. Richard Schmalensee, 1978. "Entry Deterrence in the Ready-to-Eat Breakfast Cereal Industry," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 305-327, Autumn. [Downloadable!] (restricted)
  12. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Blackwell Publishing, vol. 49(1), pages 3-13, January. [Downloadable!] (restricted)
  13. Kenneth L. Judd, 1983. "Credible Spatial Preemption," Discussion Papers 577, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Steven J. Davis & Jack MacCrisken & Kevin M. Murphy, 2001. "Economic Perspectives on Software Design: PC Operating Systems and Platforms," NBER Working Papers 8411, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Casey B. Mulligan & Kevin K. Tsui, 2008. "Political Entry, Public Policies, and the Economy," NBER Working Papers 13830, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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