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Credible Vertical Preemption

  • Ralph Siebert

This study shows that preemptive investment in product proliferation is subject to a commitment problem that is not constrained to models of horizontal product di.erentiation, but applies to vertical product di.erentiation settings as well. We investigate the incentives of firms producing high- or low- quality goods that decide simultaneously to introduce new products in di.erent quality areas. In addition, we analyze whether these keep or withdraw similar existing products from the market. The study shows that the introduction of new products depends on the credibility of firms’ innovation strategies. The high-quality firm’s strategy to proliferate the product space in order to deter the low-quality firm from introducing a new product is not credible. Innovators always withdraw their existing products from the market in order to reduce price competition or to avoid cannibalizing demand for their own products. ZUSAMMENFASSUNG - (Glaubwürdiger vertikaler Verdrängungswettbewerb) In dieser Studie untersuchen wir die Anreize etablierter Unternehmen, neue Produkte mit unterschiedlicher Qualität in den Markt einzuführen. Weiterhin untersuchen wir die Anreize der Innovatoren, die alten Produkte vom Markt abzuziehen. Wir zeigen, daß die Einführung neuer Produkte von der Glaubwürdigkeit der Innovationsstrategien abhängt, und nur in bestimmten Marktsegmenten erfolgt. Das Unternehmen, welches Produkte mit hoher Qualität anbietet, kann das Unternehmen, welches Produkte mit niedriger Qualität anbietet, nicht glaubwürdig daran hindern, ein neues Produkt in den Markt einzuführen. Es wird gezeigt, daß beide Unternehmen ein neues Produkt mit höherer Qualität zum höheren Preis anbieten, wobei das Unternehmen mit hoher Qualität noch immer die höchste Produktqualität im Markt anbietet. Darüber hinaus wird gezeigt, daß die Innovatoren ihr altes Produkt aus dem Markt ziehen, um einen höheren Preiswettbewerb und Nachfrageverdrängungseffekte zu vermeiden. Folglich werden nur zwei Produkte im Markt angeboten.

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Paper provided by Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG) in its series CIG Working Papers with number FS IV 99-20.

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Length: 26 pages
Date of creation: Oct 1999
Date of revision: Jul 2003
Handle: RePEc:wzb:wzebiv:fsiv99-20
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  1. Shaked, Avner & Sutton, John, 1983. "Natural Oligopolies," Econometrica, Econometric Society, vol. 51(5), pages 1469-83, September.
  2. Justin P. Johnson & David P. Myatt, 2003. "Multiproduct Quality Competition: Fighting Brands and Product Line Pruning," American Economic Review, American Economic Association, vol. 93(3), pages 748-774, June.
  3. Hoppe, Heidrun C. & Lee, In Ho, 2003. "Entry deterrence and innovation in durable-goods monopoly," European Economic Review, Elsevier, vol. 47(6), pages 1011-1036, December.
  4. CREMER, Helmuth & THISSE, Jacques-François, . "Location models of horizontal differentiation: a special case of vertical differentiation models," CORE Discussion Papers RP 931, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Choi, Chong Ju & Shin, Hyun Song, 1992. "A Comment on a Model of Vertical Product Differentiation," Journal of Industrial Economics, Wiley Blackwell, vol. 40(2), pages 229-31, June.
  6. repec:att:wimass:9508 is not listed on IDEAS
  7. Caplin, Andrew & Nalebuff, Barry, 1991. "Aggregation and Imperfect Competition: On the Existence of Equilibrium," Econometrica, Econometric Society, vol. 59(1), pages 25-59, January.
  8. Shabtai Donnenfeld & Shlomo Weber, 1995. "Limit Qualities and Entry Deterrence," RAND Journal of Economics, The RAND Corporation, vol. 26(1), pages 113-130, Spring.
  9. Raymond J. Deneckere & R. Preston McAfee, 1996. "Damaged Goods," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(2), pages 149-174, 06.
  10. Champsaur, Paul & Rochet, Jean-Charles, 1989. "Multiproduct Duopolists," Econometrica, Econometric Society, vol. 57(3), pages 533-57, May.
  11. Eaton, B Curtis & Lipsey, Richard G, 1979. "The Theory of Market Pre-emption: The Persistence of Excess Capacity and Monopoly in Growing Spatial Markets," Economica, London School of Economics and Political Science, vol. 46(182), pages 149-58, May.
  12. Constantatos, Christos & Perrakis, Stylianos, 1997. "Vertical differentiation: Entry and market coverage with multiproduct firms," International Journal of Industrial Organization, Elsevier, vol. 16(1), pages 81-103, November.
  13. Heidrun C. Hoppe & Ulrich Lehmann-Grube, 2001. "Second-Mover Advantages in Dynamic Quality Competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 10(3), pages 419-433, 09.
  14. 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.
  15. Avner Shaked & John Sutton, 1982. "Relaxing Price Competition Through Product Differentiation," Review of Economic Studies, Oxford University Press, vol. 49(1), pages 3-13.
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