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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|Date of creation:||Aug 1996|
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References listed on IDEAS
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Cahiers de recherche
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- Avner Shaked & John Sutton, 1982. "Relaxing Price Competition Through Product Differentiation," Review of Economic Studies, Oxford University Press, vol. 49(1), pages 3-13.
- Shlomo Weber, 1992. "On Hierarchical Spatial Competition," Review of Economic Studies, Oxford University Press, vol. 59(2), pages 407-425.
- Lutz, Stefan, 1996. "Vertical Product Differentiation, Quality Standards, and International Trade Policy," CEPR Discussion Papers 1443, C.E.P.R. Discussion Papers.
- 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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