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Stackelberg Leadership with Product Differentiation and Endogenous Entry: Some Comparative Static and Limiting Results

  • Kresimir Zigic

Allowing for endogenous entry in the traditional Stackelberg setup with product differentiation, leads to reverting of the standard comparative static and limiting results. Unlike in the standard Stackelberg setup with barriers to entry, the leader's profit increases when the differentiation becomes lower. The reason is that competition becomes tougher when products become more alike, and consequently, fewer firms enter in equilibrium. On the other hand, increasing product differentiation towards its limit results in number of entrants tending to infinity and for very large market, the profit of the leader approaches zero. Thus market structure approaches monopolistic competition, rather than the standard monopoly outcome that occurs with exogenous number of followers.

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Paper provided by The Center for Economic Research and Graduate Education - Economics Institute, Prague in its series CERGE-EI Working Papers with number wp369.

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Date of creation: Oct 2008
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Handle: RePEc:cer:papers:wp369
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  1. Hiroaki Ino & Toshihiro Matsumura, 2009. "What role should public enterprises play in free-entry markets?," Discussion Paper Series 46, School of Economics, Kwansei Gakuin University, revised Jun 2009.
  2. Federico Etro, 2006. "Aggressive leaders," RAND Journal of Economics, RAND Corporation, vol. 37(1), pages 146-154, 03.
  3. Federico Etro, 2008. "Stackelberg Competition with Endogenous Entry," Economic Journal, Royal Economic Society, vol. 118(532), pages 1670-1697, October.
  4. 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.
  5. Tasnádi, Attila, 2009. "Quantity-setting games with a dominant firm," MPRA Paper 13612, University Library of Munich, Germany.
  6. Cellini, Roberto & Lambertini, Luca & Ottaviano, Gianmarco I. P., 2004. "Welfare in a differentiated oligopoly with free entry: a cautionary note," Research in Economics, Elsevier, vol. 58(2), pages 125-133, June.
  7. Federico Etro, 2006. "Market Leaders and Industrial Policy," Working Papers 103, University of Milano-Bicocca, Department of Economics, revised Nov 2006.
  8. Mukherjee, Arijit, 2005. "Price and quantity competition under free entry," Research in Economics, Elsevier, vol. 59(4), pages 335-344, December.
  9. Federico Etro, 2004. "Innovation by leaders," Economic Journal, Royal Economic Society, vol. 114(495), pages 281-303, 04.
  10. Dixit, Avinash K., 1978. "A Model of Duopoly Suggesting a Theory of Entry Barriers," The Warwick Economics Research Paper Series (TWERPS) 125, University of Warwick, Department of Economics.
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