DP1455 Vertical Product Differentiation and Entry Deterrence
|Publication Date:||August 1996|
|Keyword(s):||Entry, Oligopoly, Product Differentiation, Quality Standards|
|JEL(s):||L12, L13, L15|
|Programme Areas:||Industrial Organization|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=1455|
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.