Vertical Product Differentiation and Entry Deterrence
This paper studies how the existence of a potential entrant influences an incumbent’s choice of quality in a model of vertical product differentiation and entry. Both firms face fixed set-up costs and quality-dependent costs of production, and compete on quality and price. With identical quality-dependent costs, the incumbent will always deter entry if possible, i.e. if fixed costs are high. Quality will be set at a level lower than the optimal quality set if entry was accommodated. If entry is not blockaded, quality will be set at a level strictly lower than the optimal quality set under monopoly.
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References listed on IDEAS
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"Price competition, quality and income disparities,"
CORE Discussion Papers RP
370, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Thomas R. Palfrey, 1984. "Spatial Equilibrium with Entry," Review of Economic Studies, Oxford University Press, vol. 51(1), pages 139-156.
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"On hierachical spatial competition,"
Discussion Paper Serie A
331, University of Bonn, Germany.
- Hung, N. M. & Schmitt, Nicolas, 1988. "Quality competition and threat of entry in duopoly," Economics Letters, Elsevier, vol. 27(3), pages 287-292.
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