Strategic Market Entry

Abstract

This paper analyzes a market entry decision involving quality and price competition. Firms may enter the market by announcing their qualities either early or late. We formulate this problem using a three-stage game: in the first stage firms commit to early or late quality decision simultaneously, in the second stage firms choose quality either simultaneously or sequentially, and in the third stage they set prices simultaneously. We show that, contrary to the common wisdom, the firm positioned closer to the best location does not necessarily have a higher profit than its competitor. Moreover, both firms will enter the market early, although intuition suggests that firms should decide qualities sequentially in order to avoid head-to-head competition.

Keywords: leadership, quality, price