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Vertical Product Differentiation, Entry-Deterrence Strategies, and Entry Qualities

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  • Noh, Yong-Hwan
  • Moschini, GianCarlo

Abstract

We analyze the entry of a new product into a vertically differentiated market in which an entrant and an incumbent compete in prices. Here the entry-deterrence strategies of the incumbent firm rely on "limit qualities." With a sequential choice of quality, a quality-dependent marginal production cost, and a fixed entry cost, we relate the entry-quality decision and the entry-deterrence strategies to the level of entry cost and the degree of consumer heterogeneity. Quality-dependent marginal production costs in the model entail the possibility of inferior-quality entry as well as an incumbent's aggressive entry-deterrence strategies of increasing its quality level toward potential entry. Welfare evaluation confirms that social welfare is not necessarily improved when entry is encouraged rather than deterred.

Suggested Citation

  • Noh, Yong-Hwan & Moschini, GianCarlo, 2006. "Vertical Product Differentiation, Entry-Deterrence Strategies, and Entry Qualities," Hebrew University of Jerusalem Archive 18410, Hebrew University of Jerusalem.
    • Handle: RePEc:ags:hebarc:18410
    DOI: 10.22004/ag.econ.18410
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    References listed on IDEAS

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