Entry and Vertical Differentiation
This paper analyzes the entry of new products into vertically differentiated markets where an entrant and an incumbent compete in quantities. The value of the new product is initially uncertain and new information is generated through purchases in the market. We derive the (unique) Markov perfect equilibrium of the infinite horizon game under the strong long run average payoff criterion. The qualitative features of the optimal entry strategy are shown to depend exclusively on the relative ranking of established and new products based on current beliefs. Superior products are launched relatively slowly and at high initial prices whereas substitutes for existing products are launched aggressively at low initial prices. The robustness of these results with respect to different model specifications is discussed. Classification-JEL: C72, C73, D43, D83 Keywords: Entry, Duopoly, Quantity Competition, Vertical Differentiation, Bayesian Learning,Markov Perfect Equilibrium, Experimentation, Experience Goods
|Date of creation:||May 2001|
|Publication status:||Published in Journal of Economic Theory (2002), 106(1): 91-125|
|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.:
- 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, 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.
- Godfrey Keller & Sven Rady, 1998. "Market Experimentation in a Dynamic Differentiated-Goods Duopoly," Game Theory and Information 9810001, EconWPA, revised 20 Aug 1999.
- Richard Ericson & Ariel Pakes, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," Review of Economic Studies, Oxford University Press, vol. 62(1), pages 53-82.
- Aghion, Philippe & Espinosa, Maria Paz & Jullien, Bruno, 1993.
"Dynamic Duopoly with Learning through Market Experimentation,"
Springer;Society for the Advancement of Economic Theory (SAET), vol. 3(3), pages 517-39, July.
- Aghion, P. & Espinoza, M.P. & Jullien, B., 1990. "Dynamic Duopoly With Learning Through Market Experimentation," DELTA Working Papers 90-13, DELTA (Ecole normale supérieure).
- Jullien Bruno & Aghion Philippe & Paz Espinoza M, 1990. "Dynamic duopoly with learning through market experimentation," CEPREMAP Working Papers (Couverture Orange) 9012, CEPREMAP.
- Kyle Bagwell & Michael Riordan, 1988.
"High and Declining Prices Signal Product Quality,"
808, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Shaked, Avner & Sutton, John, 1983. "Natural Oligopolies," Econometrica, Econometric Society, vol. 51(5), pages 1469-83, September.
- Avner Shaked & John Sutton, 1982. "Relaxing Price Competition Through Product Differentiation," Review of Economic Studies, Oxford University Press, vol. 49(1), pages 3-13.
- Jaskold Gabszewicz, J. & Thisse, J. -F., 1979.
"Price competition, quality and income disparities,"
Journal of Economic Theory,
Elsevier, vol. 20(3), pages 340-359, June.
- Mirman, Leonard J & Samuelson, Larry & Urbano, Amparo, 1993.
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(3), pages 549-63, August.
- Amparo Urbano Salvador & Larry Samuelson & Leonard J. Mirman, 1990. "Monopoly experimentation," Working Papers. Serie AD 1990-04, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
- Mirman, L.J. & Samuelson, L. & Urbano, A., 1989. "Monopoly Experimentation," Papers 8-89-7, Pennsylvania State - Department of Economics.
- Philippe Aghion & Patrick Bolton & Christopher Harris & Bruno Jullien, 1991.
"Optimal Learning by Experimentation,"
Review of Economic Studies,
Oxford University Press, vol. 58(4), pages 621-654.
- Aghion Philippe & Bolton, Patrick & Harris Christopher & Jullien Bruno, 1991. "Optimal learning by experimentation," CEPREMAP Working Papers (Couverture Orange) 9104, CEPREMAP.
- Aghion, P. & Bolton, P. & Harris, C. & Jullien, B., 1990. "Optimal Learning By Experimentation," DELTA Working Papers 90-10, DELTA (Ecole normale supérieure).
- GABSZEWICZ, Jean J. & THISSE, Jacques-François, .
"Entry (and exit) in a differentiated industry,"
CORE Discussion Papers RP
400, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- 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.
- McFadden, Daniel L & Train, Kenneth E, 1996. "Consumers' Evaluation of New Products: Learning from Self and Others," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 683-703, August.
- McLennan, Andrew, 1984. "Price dispersion and incomplete learning in the long run," Journal of Economic Dynamics and Control, Elsevier, vol. 7(3), pages 331-347, September.
- Dutta, P.K., 1991. "What Do Discounted Optima Converge To? A Theory of Discount Rate Asymptotics in Economic Models," RCER Working Papers 264, University of Rochester - Center for Economic Research (RCER).
- Trefler, Daniel, 1993. "The Ignorant Monopolist: Optimal Learning with Endogenous Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(3), pages 565-81, August.
- Rothschild, Michael, 1974. "A two-armed bandit theory of market pricing," Journal of Economic Theory, Elsevier, vol. 9(2), pages 185-202, October.
- 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.
- Patrick Bolton & Christopher Harris, 1999. "Strategic Experimentation," Econometrica, Econometric Society, vol. 67(2), pages 349-374, March.
- 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.
- Prescott, Edward C, 1972. "The Multi-Period Control Problem Under Uncertainty," Econometrica, Econometric Society, vol. 40(6), pages 1043-58, November.
- Easley, David & Kiefer, Nicholas M, 1988. "Controlling a Stochastic Process with Unknown Parameters," Econometrica, Econometric Society, vol. 56(5), pages 1045-64, September.
- Andrew Ching, 2000. "Dynamic Equilibrium in the US Prescription Drug Market After Patent Expiration," Econometric Society World Congress 2000 Contributed Papers 1242, Econometric Society.
- Dirk Bergemann & Juuso Valimaki, 1996.
"Market Diffusion with Two-Sided Learning,"
Cowles Foundation Discussion Papers
1138, Cowles Foundation for Research in Economics, Yale University.
When requesting a correction, please mention this item's handle: RePEc:cwl:cwldpp:1302. 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.