Discussion Paper Details

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Title: Vertical Product Differentiation and Entry Deterrence

Author(s): Stefan Lutz

Publication Date: August 1996

Keyword(s): Entry, Oligopoly, Product Differentiation and Quality Standards

Programme Area(s): Industrial Organization

Abstract: This paper studies how the existence of a potential entrant influences an incumbent?s choice of quality in a model of vertical product differentiation and entry. Both firms face fixed set-up costs and quality-dependent costs of production, and compete on quality and price. With identical quality-dependent costs, the incumbent will always deter entry if possible, i.e. if fixed costs are high. Quality will be set at a level lower than the optimal quality set if entry was accommodated. If entry is not blockaded, quality will be set at a level strictly lower than the optimal quality set under monopoly.

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Bibliographic Reference

Lutz, S. 1996. 'Vertical Product Differentiation and Entry Deterrence'. London, Centre for Economic Policy Research.