Product Differentiation, Entry and Undercut-Proof Equilibrium
In this paper, we explore how an incumbent firm reacts to entry when entry in one market affects the demand in its other market. We show that putting a stiff price competition with the entrant is desirable only if this leads to a situation where the incumbent can serve the whole demand through its other market. Nevertheless, this kind of behaviour may not be always desirable to the incumbent firm, especially when it earns zero profit by doing so. Hence, the natural question arises whether the incumbent can do better in those situations which is desirable for both firms. To that end we develop the concept of Undercut-Proof equilibrium and use it to show how the competing firms can share the market and earn positive profits.
|Date of creation:||01 Mar 1995|
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