Title

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

Campus Units

Economics, Center for Agricultural and Rural Development

Document Type

Article

Publication Version

Submitted Manuscript

Publication Date

11-2006

Journal or Book Title

Review of Industrial Organization

Volume

29

Issue

3

First Page or Article ID Number

227

Last Page

252

DOI

10.1007/s11151-006-9115-7

Abstract

We analyze the potential entry of a new product into a vertically differentiated market. Here the entry-deterrence strategies of the incumbent firm rely on “limit qualities.” The model assumes quality-dependent marginal production costs and considers sequential quality choices by an incumbent and an entrant. Entry-quality decisions and the entry-deterrence strategies are related to the fixed cost necessary for entry and to the degree of consumers’ taste for quality. We detail the conditions under which the incumbent increases its quality level to deter entry. Quality-dependent marginal production costs in the model entail the possibility of inferior-quality entry as well. Welfare is not necessarily improved when entry is encouraged rather than deterred.

Comments

This is a working paper of an article from Review of Industrial Organization 29 (2006): 227, doi: 10.1007/s11151-006-9115-7.