Vertical Product Differentiation, Entry-Deterrence Strategies, and Entry Qualities, September 2005

(2005) Vertical Product Differentiation, Entry-Deterrence Strategies, and Entry Qualities, September 2005. Iowa State University

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Abstract

We analyze the entry of a new product into a vertically differentiated market in which an entrant and an incumbent compete in prices. Here the entry-deterrence strategies of the incumbent firm rely on “limit qualities.” With a sequential choice of quality, a quality-dependent marginal production cost, and a fixed entry cost, we relate the entry-quality decision and the entry-deterrence strategies to the level of entry cost and the degree of consumer heterogeneity. Quality-dependent marginal production costs in the model entail the possibility of inferior-quality entry as well as an incumbent’s aggressive entry-deterrence strategies of increasing its quality level toward potential entry. Welfare evaluation confirms that social welfare is not necessarily improved when entry is encouraged rather than deterred.

Item Type: Departmental Report
Keywords: entry deterrence, quality choice, vertical product differentiation
Subjects: Business and industry > Economic development
Business and industry
Business and industry > Economic forecasts
ID Code: 2876
Deposited By: Margaret Barr
Deposited On: 13 Oct 2005
Last Modified: 13 Oct 2005
URI: http://publications.iowa.gov/id/eprint/2876

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