Entry and Innovation in Vertically Differentiated Markets

51 Pages Posted: 19 Aug 1999

See all articles by Dirk Bergemann

Dirk Bergemann

Yale University - Cowles Foundation - Department of Economics; Yale University - Cowles Foundation

Juuso Valmaki

affiliation not provided to SSRN

Date Written: June 1999

Abstract

This paper analyzes the optimal entry into experience goods markets with vertically differentiated buyers. We consider the case where the value of the new product is imperfectly known, but common to all buyers (common values) as well as the case where the quality is different across buyers (private values).

We distinguish between new products that are improvements to existing products and new products that are substitutes. Different types of products have qualitatively distinct diffusion paths. Improvements are introduced slowly relative to the full information case, while substitutes are introduced more aggressively. The slow entry strategy is associated with increasing supply and decreasing prices over time. The reverse pattern holds for an aggressive entry strategy.

The incentives to innovate display a similar distinction. A firm with a currently inferior product opts for a large but risky innovation, whereas a currently superior producer chooses a smaller but certain innovation.

JEL Classification: L13

Suggested Citation

Bergemann, Dirk and Valmaki, Juuso, Entry and Innovation in Vertically Differentiated Markets (June 1999). Cowles Foundation Working Paper No. 1226. Available at SSRN: https://ssrn.com/abstract=168372

Dirk Bergemann (Contact Author)

Yale University - Cowles Foundation - Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States
203-432-3592 (Phone)
203-432-2128 (Fax)

HOME PAGE: http://www.econ.yale.edu/~dirk/

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

Juuso Valmaki

affiliation not provided to SSRN

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