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Do we see monopoly or duopoly? The influence of perception on entry deterrence

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  • Edward John Dorrell Webb

    (Department of Economics, Copenhagen University)

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    Consumers have bounded perception and treat similar goods as homogeneous. The interaction between this bias and the structure of firms is studied in a vertically differentiated duopoly with market entry. With fixed costs of quality, natural monopoly and entry deterrence occurs at lower entry costs and incumbent profit is higher. With marginal costs of quality, natural monopoly occurs at higher entry costs or not at all. Deterrence occurs at higher entry costs for mild perceptual limitations and at lower costs for severe limitations. Incumbent profit is generally lower, although for a narrow range of parameter values it may be higher. The incumbent may opt not to enter and no market is created.

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    File URL: http://www.econ.ku.dk/english/research/publications/wp/dp_2014/1420.pdf
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    Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 14-20.

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    Length: 44 pages
    Date of creation: 08 Oct 2014
    Handle: RePEc:kud:kuiedp:1420
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