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Optimal Pricing And Quality Choice When Investment In Quality Is Irreversible

  • Enrico Pennings

This paper examines the price and quality choice of a single product, risk-neutral monopolist who can delay irreversible investments required for market entry. It is shown that the price and quality she chooses at entry increase with uncertainty about the size of future demand. In a Stackelberg leader-follower game, the leader and follower pre-commit immediately up to a certain level of uncertainty. In this case the leader produces the higher quality good. When uncertainty is higher than this threshold, the follower will wait and enter the market later with a higher quality good. Copyright Blackwell Publishing Ltd. 2004.

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Article provided by Wiley Blackwell in its journal The Journal of Industrial Economics.

Volume (Year): 52 (2004)
Issue (Month): 4 (December)
Pages: 569-589

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Handle: RePEc:bla:jindec:v:52:y:2004:i:4:p:569-589
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  1. Motta, Massimo, 1993. "Endogenous Quality Choice: Price vs. Quantity Competition," Journal of Industrial Economics, Wiley Blackwell, vol. 41(2), pages 113-31, June.
  2. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November.
  3. Giovanni Maggi, 1996. "Endogenous Leadership in a New Market," RAND Journal of Economics, The RAND Corporation, vol. 27(4), pages 641-659, Winter.
  4. Nalin Kulatilaka & Enrico C. Perotti, 1998. "Strategic Growth Options," Management Science, INFORMS, vol. 44(8), pages 1021-1031, August.
  5. Sadanand, Asha & Sadanand, Venkatraman, 1996. "Firm Scale and the Endogenous Timing of Entry: a Choice between Commitment and Flexibility," Journal of Economic Theory, Elsevier, vol. 70(2), pages 516-530, August.
  6. Boom, Anette, 1995. "Asymmetric International Minimum Quality Standards and Vertical Differentiation," Journal of Industrial Economics, Wiley Blackwell, vol. 43(1), pages 101-19, March.
  7. Bart Lambrecht & William Perraudin, 1996. "Real Options and Preemption," Archive Working Papers 026, Birkbeck, Department of Economics, Mathematics & Statistics.
  8. Spencer, Barbara J. & Brander, James A., 1992. "Pre-commitment and flexibility : Applications to oligopoly theory," European Economic Review, Elsevier, vol. 36(8), pages 1601-1626, December.
  9. Aoki, Reiko & Prusa, Thomas J., 1997. "Sequential versus simultaneous choice with endogenous quality," International Journal of Industrial Organization, Elsevier, vol. 15(1), pages 103-121, February.
  10. Rashid, Salim, 1988. "Quality in Contestable Markets: A Historical Problem?," The Quarterly Journal of Economics, MIT Press, vol. 103(1), pages 245-49, February.
  11. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, 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.
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