Entry and Vertical Differentiation

41 Pages Posted: 4 Jun 2001

See all articles by Dirk Bergemann

Dirk Bergemann

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

Juuso Valimaki

Helsinki School of Economics; University of Southampton - Division of Economics

Date Written: May 2001

Abstract

This paper analyzes the entry of new products into vertically differentiated markets where an entrant and an incumbent compete in quantities. The value of the new product is initially uncertain and new information is generated through purchases in the market. We derive the (unique) Markov perfect equilibrium of the infinite horizon game under the strong long run average payoff criterion.

The qualitative features of the optimal entry strategy are shown to depend exclusively on the relative ranking of established and new products based on current beliefs. Superior products are launched relatively slowly and at high initial prices whereas substitutes for existing products are launched aggressively at low initial prices.

The robustness of these results with respect to different model specifications is discussed.

Keywords: Entry, Duopoly, Quantity Competition, Vertical Differentiation, Bayesian Learning, Markov Perfect Equilibrium, Experimentation, Experience Goods

JEL Classification: C72, C73, D43, D83

Suggested Citation

Bergemann, Dirk and Valimaki, Juuso, Entry and Vertical Differentiation (May 2001). Journal of Economic Theory, Forthcoming. Available at SSRN: https://ssrn.com/abstract=271914

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 Valimaki

Helsinki School of Economics ( email )

P.O. Box 21210
Helsinki 00100, 00101
Finland

University of Southampton - Division of Economics ( email )

Southampton, SO17 1BJ
United Kingdom
+44 23 8059 3263 (Phone)

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