Do we see monopoly or duopoly? The influence of perception on entry deterrence

Edward Webb
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Edward Webb: Department of Economics, Copenhagen University

No 14-20, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: Consumers have bounded perception and treat similar goods as homogeneous. The interaction between this bias and the structure of firms is studied in a vertically differentiated duopoly with market entry. With fixed costs of quality, natural monopoly and entry deterrence occurs at lower entry costs and incumbent profit is higher. With marginal costs of quality, natural monopoly occurs at higher entry costs or not at all. Deterrence occurs at higher entry costs for mild perceptual limitations and at lower costs for severe limitations. Incumbent profit is generally lower, although for a narrow range of parameter values it may be higher. The incumbent may opt not to enter and no market is created.

Keywords: perception; similarity; bounded rationality; vertical differentiation; entry deterrence; oligopoly (search for similar items in EconPapers)
JEL-codes: D03 D42 D43 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2014-10-08
New Economics Papers: this item is included in nep-bec, nep-com and nep-ind
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