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

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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.

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Authors and Affiliations

  1. Economist, Institute for Monetary and Economic Research, Bank of Korea, 110, 3-Ga, Namdaemun-Ro, Jung-Gu, Seoul, 100-794, Republic of Korea

    Yong-Hwan Noh

  2. Department of Economics, Iowa State University, Ames, IA, 50011–1070, USA

    Giancarlo Moschini

Authors
  1. Yong-Hwan Noh
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  2. Giancarlo Moschini
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Correspondence to Giancarlo Moschini.

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Noh, YH., Moschini, G. Vertical Product Differentiation, Entry-Deterrence Strategies, and Entry Qualities. Rev Ind Organ 29, 227–252 (2006). https://doi.org/10.1007/s11151-006-9115-7

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