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Entry, Pricing and Product Design in an Initially Monopolized Market

54 Pages Posted: 18 Oct 2001  

Steven J. Davis

University of Chicago; National Bureau of Economic Research (NBER)

Kevin M. Murphy

University of Chicago; National Bureau of Economic Research (NBER)

Robert H. Topel

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

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Date Written: October 2001

Abstract

We analyze entry, pricing and product design in a model with differentiated products. Under plausible conditions, entry into an initially monopolized market leads to higher prices for some, possibly all, consumers. Entry can induce a misallocation of goods to consumers, segment the market in a way that transfers surplus to producers and undermine aggressive pricing by the incumbent. Post entry, firms have strong incentives to modify product designs so as to raise price by strengthening market segmentation. Firms may also forego socially beneficial product improvements in the post-entry equilibrium, because they intensify price competition too much. Multi-product monopoly can lead to better design incentives than the non-cooperative pricing that prevails under competition.

Suggested Citation

Davis, Steven J. and Murphy, Kevin M. and Topel, Robert H., Entry, Pricing and Product Design in an Initially Monopolized Market (October 2001). NBER Working Paper No. w8547. Available at SSRN: https://ssrn.com/abstract=287744

Steven J. Davis (Contact Author)

University of Chicago ( email )

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National Bureau of Economic Research (NBER)

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Kevin M. Murphy

University of Chicago ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7280 (Phone)
773-702-2699 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Robert H. Topel

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7524 (Phone)
773-702-2699 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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