Citation

Discussion Paper Details

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Title: Dynamic Entry in Vertically Differentiated Markets

Author(s): Raphael Auer and Philip Saur�

Publication Date: June 2014

Keyword(s): Endogenous Growth, Natural Monopoly, Non-homogenous Preferences, Product Quality, Quality Ladders and Vertical Differentiation

Programme Area(s): Industrial Organization and International Trade and Regional Economics

Abstract: We develop a model of vertical innovation in which firms incur a market entry cost and choose a unique level of quality. Once established, firms compete for market shares, selling to consumers with heterogeneous tastes for quality. The equilibrium of the pricing game exists and is unique within our setup. Exogenous productivity growth induces firms to enter the market sequentially at the top end of the quality spectrum. A central feature of the model is that optimization problems of consecutive entrants are self-similar so that new firms enter in constant time-intervals and choose qualities that are a constant fraction higher than incumbent qualities. The asymmetries of quality choice, which inevitably arise because the quality spectrum has top and a bottom, is thus overcome by sequential entry. Our main contribution lies in handling these asymmetries.

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Bibliographic Reference

Auer, R and Saur�, P. 2014. 'Dynamic Entry in Vertically Differentiated Markets'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10027