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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)

Abstract

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.

Suggested Citation

  • Edward John Dorrell Webb, 2014. "Do we see monopoly or duopoly? The influence of perception on entry deterrence," Discussion Papers 14-20, University of Copenhagen. Department of Economics.
    • Handle: RePEc:kud:kuiedp:1420
    as

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    File URL: http://www.econ.ku.dk/english/research/publications/wp/dp_2014/1420.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    perception; similarity; bounded rationality; vertical differentiation; entry deterrence; oligopoly;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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