Entry and Innovation in Vertically Differentiated Markets
This paper analyzes the optimal entry into experience goods markets with vertically differentiated buyers. We consider the case where the value of the new product is imperfectly known, but common to all buyers (common values) as well as the case where the quality is different across buyers (private values). We distinguish between new products that are improvements to existing products and new products that are substitutes. Different types of products have qualitatively distinct diffusion paths. Improvements are introduced slowly relative to the full information case, while substitutes are introduced more aggressively. The slow entry strategy is associated with increasing supply and decreasing prices over time. The reverse pattern holds for an aggressive entry strategy The incentives to innovate display a similar distinction. A firm with a currently inferior product opts for a large but risky innovation, whereas a currently superior producer chooses a smaller but certain innovation.
|Date of creation:||Jun 1999|
|Contact details of provider:|| Postal: Yale University, Box 208281, New Haven, CT 06520-8281 USA|
Phone: (203) 432-3702
Fax: (203) 432-6167
Web page: http://cowles.yale.edu/
More information through EDIRC
|Order Information:|| Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Philippe Aghion & Peter Howitt, 1990.
"A Model of Growth Through Creative Destruction,"
NBER Working Papers
3223, National Bureau of Economic Research, Inc.
- Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
- Aghion, P. & Howitt, P., 1990. "A Model Of Growth Through Creative Destruction," DELTA Working Papers 90-12, DELTA (Ecole normale supérieure).
- Aghion, P. & Howitt, P., 1989. "A Model Of Growth Through Creative Destruction," UWO Department of Economics Working Papers 8904, University of Western Ontario, Department of Economics.
- Aghion, P. & Howitt, P., 1989. "A Model Of Growth Through Creative Destruction," Working papers 527, Massachusetts Institute of Technology (MIT), Department of Economics.
- Dirk Bergemann & Juuso Valimaki, 1996.
"Market Diffusion with Two-Sided Learning,"
Cowles Foundation Discussion Papers
1138, Cowles Foundation for Research in Economics, Yale University.
- Amparo Urbano Salvador & Larry Samuelson & Leonard J. Mirman, 1990.
Working Papers. Serie AD
1990-04, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
- Rothschild, Michael, 1974. "A two-armed bandit theory of market pricing," Journal of Economic Theory, Elsevier, vol. 9(2), pages 185-202, October.
- Jaskold Gabszewicz, J. & Thisse, J. -F., 1980.
"Entry (and exit) in a differentiated industry,"
Journal of Economic Theory,
Elsevier, vol. 22(2), pages 327-338, April.
- Godfrey Keller & Sven Rady, 1999.
"Market experimentation in a dynamic differentiated-goods duopoly,"
LSE Research Online Documents on Economics
19346, London School of Economics and Political Science, LSE Library.
- Godfrey Keller & Sven Rady, 1998. "Market Experimentation in a Dynamic Differentiated-Goods Duopoly," Game Theory and Information 9810001, EconWPA, revised 20 Aug 1999.
- Godfrey Keller & Sven Rady, 1999. "Market Experimentation in a Dynamic Differentiated-Goods Duopoly," STICERD - Theoretical Economics Paper Series 369, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
- Avner Shaked & John Sutton, 1982. "Relaxing Price Competition Through Product Differentiation," Review of Economic Studies, Oxford University Press, vol. 49(1), pages 3-13.
- Gene M. Grossman & Elhanan Helpman, 1989.
"Quality Ladders in the Theory of Growth,"
NBER Working Papers
3099, National Bureau of Economic Research, Inc.
- GABSZEWICZ, Jean J. & THISSE, Jacques-François, "undated".
"Price competition, quality and income disparities,"
CORE Discussion Papers RP
370, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Paul R. Milgrom & John Roberts, 1984.
"Price and Advertising Signals of Product Quality,"
Cowles Foundation Discussion Papers
709, Cowles Foundation for Research in Economics, Yale University.
- Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
- Harrington Jr. , Joseph E., 1995. "Experimentation and Learning in a Differentiated-Products Duopoly," Journal of Economic Theory, Elsevier, vol. 66(1), pages 275-288, June.
- Kenneth L. Judd & Michael H. Riordan, 1994. "Price and Quality in a New Product Monopoly," Review of Economic Studies, Oxford University Press, vol. 61(4), pages 773-789.
- Prescott, Edward C, 1972. "The Multi-Period Control Problem Under Uncertainty," Econometrica, Econometric Society, vol. 40(6), pages 1043-1058, November.
- Bagwell, Kyle & Riordan, Michael H, 1991.
"High and Declining Prices Signal Product Quality,"
American Economic Review,
American Economic Association, vol. 81(1), pages 224-239, March.
- Aghion, Philippe & Harris, Christopher & Vickers, John, 1997. "Competition and growth with step-by-step innovation: An example," European Economic Review, Elsevier, vol. 41(3-5), pages 771-782, April.
When requesting a correction, please mention this item's handle: RePEc:cwl:cwldpp:1226. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Matthew C. Regan)
If references are entirely missing, you can add them using this form.