IDEAS home Printed from https://ideas.repec.org/p/wzb/wzebiv/fsiv99-20.html
   My bibliography  Save this paper

Credible Vertical Preemption

Author

Listed:
  • Ralph Siebert

Abstract

This study shows that preemptive investment in product proliferation is subject to a commitment problem that is not constrained to models of horizontal product di.erentiation, but applies to vertical product di.erentiation settings as well. We investigate the incentives of firms producing high- or low- quality goods that decide simultaneously to introduce new products in di.erent quality areas. In addition, we analyze whether these keep or withdraw similar existing products from the market. The study shows that the introduction of new products depends on the credibility of firms’ innovation strategies. The high-quality firm’s strategy to proliferate the product space in order to deter the low-quality firm from introducing a new product is not credible. Innovators always withdraw their existing products from the market in order to reduce price competition or to avoid cannibalizing demand for their own products. ZUSAMMENFASSUNG - (Glaubwürdiger vertikaler Verdrängungswettbewerb) In dieser Studie untersuchen wir die Anreize etablierter Unternehmen, neue Produkte mit unterschiedlicher Qualität in den Markt einzuführen. Weiterhin untersuchen wir die Anreize der Innovatoren, die alten Produkte vom Markt abzuziehen. Wir zeigen, daß die Einführung neuer Produkte von der Glaubwürdigkeit der Innovationsstrategien abhängt, und nur in bestimmten Marktsegmenten erfolgt. Das Unternehmen, welches Produkte mit hoher Qualität anbietet, kann das Unternehmen, welches Produkte mit niedriger Qualität anbietet, nicht glaubwürdig daran hindern, ein neues Produkt in den Markt einzuführen. Es wird gezeigt, daß beide Unternehmen ein neues Produkt mit höherer Qualität zum höheren Preis anbieten, wobei das Unternehmen mit hoher Qualität noch immer die höchste Produktqualität im Markt anbietet. Darüber hinaus wird gezeigt, daß die Innovatoren ihr altes Produkt aus dem Markt ziehen, um einen höheren Preiswettbewerb und Nachfrageverdrängungseffekte zu vermeiden. Folglich werden nur zwei Produkte im Markt angeboten.

Suggested Citation

  • 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.
    • Handle: RePEc:wzb:wzebiv:fsiv99-20
    as

    Download full text from publisher

    File URL: http://skylla.wz-berlin.de/pdf/1999/iv99-20r.pdf
    File Function: Full text (revised version)
    Download Restriction: no
    File URL: http://skylla.wz-berlin.de/pdf/1999/iv99-20.pdf
    File Function: Full text (original version)
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Constantatos, Christos & Perrakis, Stylianos, 1997. "Vertical differentiation: Entry and market coverage with multiproduct firms," International Journal of Industrial Organization, Elsevier, vol. 16(1), pages 81-103, November.
    2. Kenneth L. Judd, 1985. "Credible Spatial Preemption," RAND Journal of Economics, The RAND Corporation, vol. 16(2), pages 153-166, Summer.
    3. Hoppe, Heidrun C. & Lee, In Ho, 2003. "Entry deterrence and innovation in durable-goods monopoly," European Economic Review, Elsevier, vol. 47(6), pages 1011-1036, December.
    4. Champsaur, Paul & Rochet, Jean-Charles, 1989. "Multiproduct Duopolists," Econometrica, Econometric Society, vol. 57(3), pages 533-557, May.
    5. Heidrun C. Hoppe & Ulrich Lehmann‐Grube, 2001. "Second‐Mover Advantages in Dynamic Quality Competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 10(3), pages 419-433, September.
    6. Justin P. Johnson & David P. Myatt, 2003. "Multiproduct Quality Competition: Fighting Brands and Product Line Pruning," American Economic Review, American Economic Association, vol. 93(3), pages 748-774, June.
    7. Ulrich Lehmann-Grube, 1997. "Strategic Choice of Quality When Quality is Costly: The Persistence of the High-Quality Advantage," RAND Journal of Economics, The RAND Corporation, vol. 28(2), pages 372-384, Summer.
    8. 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.
    9. Avner Shaked & John Sutton, 1982. "Relaxing Price Competition Through Product Differentiation," Review of Economic Studies, Oxford University Press, vol. 49(1), pages 3-13.
    10. Shabtai Donnenfeld & Shlomo Weber, 1995. "Limit Qualities and Entry Deterrence," RAND Journal of Economics, The RAND Corporation, vol. 26(1), pages 113-130, Spring.
    11. Caplin, Andrew & Nalebuff, Barry, 1991. "Aggregation and Imperfect Competition: On the Existence of Equilibrium," Econometrica, Econometric Society, vol. 59(1), pages 25-59, January.
    12. Jaskold Gabszewicz, J. & Thisse, J. -F., 1979. "Price competition, quality and income disparities," Journal of Economic Theory, Elsevier, vol. 20(3), pages 340-359, June.
    13. Raymond J. Deneckere & R. Preston McAfee, 1996. "Damaged Goods," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(2), pages 149-174, June.
    14. Cremer, Helmuth & Thisse, Jacques-Francois, 1991. "Location Models of Horizontal Differentiation: A Special Case of Vertical Differentiation Models," Journal of Industrial Economics, Wiley Blackwell, vol. 39(4), pages 383-390, June.
    15. Choi, Chong Ju & Shin, Hyun Song, 1992. "A Comment on a Model of Vertical Product Differentiation," Journal of Industrial Economics, Wiley Blackwell, vol. 40(2), pages 229-231, June.
    16. 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 149-158, May.
    17. Scott J. Wallsten, 2000. "The Effects of Government-Industry R&D Programs on Private R&D: The Case of the Small Business Innovation Research Program," RAND Journal of Economics, The RAND Corporation, vol. 31(1), pages 82-100, Spring.
    18. Shaked, Avner & Sutton, John, 1983. "Natural Oligopolies," Econometrica, Econometric Society, vol. 51(5), pages 1469-1483, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Yong-Hwan Noh & Giancarlo Moschini, 2006. "Vertical Product Differentiation, Entry-Deterrence Strategies, and Entry Qualities," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 29(3), pages 227-252, November.
    2. Lutz, Stefan, 2005. "Regulatory standards can lead to predation," ZEI Working Papers B 05-2005, University of Bonn, ZEI - Center for European Integration Studies.
    3. Mina Baliamoune-Lutz & Stefan Lutz, 2010. "Pre-emption, Predation, and Minimum Quality Standards," International Economic Journal, Taylor & Francis Journals, vol. 24(1), pages 111-123.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ralph Siebert, 1999. "The Impact of R&D Subsidies on the Introduction of New Products by Incumbent Firms old title -(New Product Introduction by Incumbent Firms)," CIG Working Papers FS IV 99-19, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG), revised Aug 2003.
    2. Ralph Siebert, 2003. "The Introduction of New Product Qualities by Incumbent Firms: Market Proliferation versus Cannibalization," CIG Working Papers SP II 2003-11, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
    3. Siebert, Ralph, 2003. "The Impact of R&D Subsidies on the Introduction of New Products by Incumbent Firms," CEPR Discussion Papers 4090, C.E.P.R. Discussion Papers.
    4. Justin P. Johnson & David P. Myatt, 2006. "Multiproduct Cournot oligopoly," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 583-601, September.
    5. Liang Lu, 2015. "Proliferation and Entry Deterrence in Vertically Differentiated Markets," Working Paper series, University of East Anglia, Centre for Competition Policy (CCP) 2015-06, Centre for Competition Policy, University of East Anglia, Norwich, UK..
    6. Constantatos, Christos & Perrakis, Stylianos, 1995. "Différenciation verticale et structure du marché," L'Actualité Economique, Société Canadienne de Science Economique, vol. 71(1), pages 71-98, mars.
    7. Yong-Hwan Noh & Giancarlo Moschini, 2006. "Vertical Product Differentiation, Entry-Deterrence Strategies, and Entry Qualities," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 29(3), pages 227-252, November.
    8. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899, October.
    9. Justin P. Johnson & David P. Myatt, 2003. "Multiproduct Quality Competition: Fighting Brands and Product Line Pruning," American Economic Review, American Economic Association, vol. 93(3), pages 748-774, June.
    10. Barigozzi, Francesca & Ma, Ching-to Albert, 2018. "Product differentiation with multiple qualities," International Journal of Industrial Organization, Elsevier, vol. 61(C), pages 380-412.
    11. Peter-J. Jost, 2023. "Price commitment and the strategic launch of a fighter brand," Quantitative Marketing and Economics (QME), Springer, vol. 21(3), pages 381-435, September.
    12. Laine, Liisa T. & Ma, Ching-to Albert, 2017. "Quality and competition between public and private firms," Journal of Economic Behavior & Organization, Elsevier, vol. 140(C), pages 336-353.
    13. Manez, J.A. & Waterson, M., 2001. "Multiproduct Firms and Product Differentiation: a Survey," The Warwick Economics Research Paper Series (TWERPS) 594, University of Warwick, Department of Economics.
    14. Peitz, Martin, 2002. "The pro-competitive effect of higher entry costs," International Journal of Industrial Organization, Elsevier, vol. 20(3), pages 353-364, March.
    15. Fabian Herweg, 2012. "Relaxing competition through quality differentiation and price discrimination," Journal of Economics, Springer, vol. 106(1), pages 1-26, May.
    16. Luca Lambertini & Piero Tedeschi, 2007. "On the Social Desirability of Patents for Sequential Innovations in a Vertically Differentiated Market," Journal of Economics, Springer, vol. 90(2), pages 193-214, March.
    17. Yi-Ling Cheng & Shin-Kun Peng, 2012. "Quality and Quantity Competition in a Multiproduct Duopoly," Southern Economic Journal, John Wiley & Sons, vol. 79(1), pages 180-202, July.
    18. Ashiya, M., 1999. "Brand Proliferation is Useless to Deter Entry," ISER Discussion Paper 0476, Institute of Social and Economic Research, Osaka University.
    19. Constantatos, Christos & Perrakis, Stylianos, 1997. "Vertical differentiation: Entry and market coverage with multiproduct firms," International Journal of Industrial Organization, Elsevier, vol. 16(1), pages 81-103, November.
    20. Robert Schmidt, 2006. "On the Robustness of the High-Quality Advantage under Vertical Differentiation," Journal of Industry, Competition and Trade, Springer, vol. 6(3), pages 183-193, December.

    More about this item

    Keywords

    New Product Introduction; Preemption; Product Innovation; Product Proliferation; Vertical Product Differentiation.;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wzb:wzebiv:fsiv99-20. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Jennifer Rontganger (email available below). General contact details of provider: https://edirc.repec.org/data/cicwzde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.