Entry, Pricing, and Product Design in an Initially Monopolized Market

Posted: 26 Jan 2004

See all articles by Steven J. Davis

Steven J. Davis

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

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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Abstract

We analyze entry, pricing, and product design in a model with differentiated products. Market equilibrium can be "separating," with multiple sellers and a sorting of heterogeneous consumers across goods, or "exclusionary," with one seller serving all customer types. Entry into an initially monopolized market can occur because of cost reductions or product improvements, but entry need not lower the incumbent's price, improve efficiency, or raise consumer welfare. Postentry design incentives favor a softening of price competition and stronger market segmentation, whereas exclusionary design changes typically raise consumer welfare. Potential, as distinct from actual, entry always benefits consumers.

Suggested Citation

Davis, Steven J. and Murphy, Kevin M. and Topel, Robert H., Entry, Pricing, and Product Design in an Initially Monopolized Market. Journal of Political Economy, Vol. 112, No. 1, pp. S188-S225, February 2004. Available at SSRN: https://ssrn.com/abstract=489695

Steven J. Davis (Contact Author)

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Kevin M. Murphy

University of Chicago ( email )

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National Bureau of Economic Research (NBER)

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Robert H. Topel

University of Chicago - Booth School of Business ( email )

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National Bureau of Economic Research (NBER)

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