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Entry, Pricing and Product Design in an Initially Monopolized Market

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  • Steven J. Davis
  • Kevin M. Murphy
  • Robert H. Topel

Abstract

We analyze entry, pricing and product design in a model with differentiated products. Under plausible conditions, entry into an initially monopolized market leads to higher prices for some, possibly all, consumers. Entry can induce a misallocation of goods to consumers, segment the market in a way that transfers surplus to producers and undermine aggressive pricing by the incumbent. Post entry, firms have strong incentives to modify product designs so as to raise price by strengthening market segmentation. Firms may also forego socially beneficial product improvements in the post-entry equilibrium, because they intensify price competition too much. Multi-product monopoly can lead to better design incentives than the non-cooperative pricing that prevails under competition.

Suggested Citation

  • Steven J. Davis & Kevin M. Murphy & Robert H. Topel, 2001. "Entry, Pricing and Product Design in an Initially Monopolized Market," NBER Working Papers 8547, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:8547 Note: IO
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Ferrara, Ida & Missios, Paul, 2012. "Pricing of drugs with heterogeneous health insurance coverage," Journal of Health Economics, Elsevier, vol. 31(2), pages 440-456.
    2. Steven J. Davis & Jack MacCrisken & Kevin M. Murphy, 2001. "Economic Perspectives on Software Design: PC Operating Systems and Platforms," NBER Working Papers 8411, National Bureau of Economic Research, Inc.
    3. Mulligan, Casey B. & Tsui, Kevin K., 2015. "Political entry, public policies, and the economy," Research in Economics, Elsevier, pages 377-397.
    4. Lee G. Branstetter & Chirantan Chatterjee & Matthew Higgins, 2011. "Regulation and Welfare: Evidence from Paragraph IV Generic Entry in the Pharmaceutical Industry," NBER Working Papers 17188, National Bureau of Economic Research, Inc.
    5. Byford, Martin C., 2015. "A theoretical foundation for the undercut-proof equilibrium," Journal of Economic Theory, Elsevier, vol. 159(PA), pages 209-220.
    6. Ikuo Ishibashi & Noriaki Matsushima, 2006. "Inviting entrants may help incumbent firms," Discussion Papers 2006-46, Kobe University, Graduate School of Business Administration.
    7. Mulligan, Casey B. & Tsui, Kevin K., 2015. "Political entry, public policies, and the economy," Research in Economics, Elsevier, pages 377-397.
    8. Ikuo Ishibashi & Noriaki Matsushima, 2009. "The Existence of Low-End Firms May Help High-End Firms," Marketing Science, INFORMS, vol. 28(1), pages 136-147, 01-02.
    9. Yuxin Chen & Jinhong Xie, 2007. "Cross-Market Network Effect with Asymmetric Customer Loyalty: Implications for Competitive Advantage," Marketing Science, INFORMS, vol. 26(1), pages 52-66, 01-02.

    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly

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