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Credible Vertical Preemption

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  • Ralph Siebert

Abstract

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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  • Ralph Siebert, 1999. "Credible Vertical Preemption," CIG Working Papers FS IV 99-20, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG), revised Jul 2003.
    • Handle: RePEc:wzb:wzebiv:fsiv99-20
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    References listed on IDEAS

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    Cited by:

    1. Yong-Hwan Noh & Giancarlo Moschini, 2006. "Vertical Product Differentiation, Entry-Deterrence Strategies, and Entry Qualities," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 29(3), pages 227-252, November.
    2. Lutz, Stefan, 2005. "Regulatory standards can lead to predation," ZEI Working Papers B 05-2005, University of Bonn, ZEI - Center for European Integration Studies.
    3. Mina Baliamoune-Lutz & Stefan Lutz, 2010. "Pre-emption, Predation, and Minimum Quality Standards," International Economic Journal, Taylor & Francis Journals, vol. 24(1), pages 111-123.

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    More about this item

    Keywords

    New Product Introduction; Preemption; Product Innovation; Product Proliferation; Vertical Product Differentiation.;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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