Vertical Product Differentiation and Entry Deterrence
Posted: 14 Jan 2003
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.
JEL Classification: L12, L13, L15
Suggested Citation: Suggested Citation
Lutz, Stefan and Lutz, Stefan, Vertical Product Differentiation and Entry Deterrence. Available at SSRN: https://ssrn.com/abstract=360340
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