Incumbent Repositioning Against Entry in a Vertically Differentiated Market

Morifumi Hirao ()
Additional contact information
Morifumi Hirao: Otemon Gakuin University

Review of Industrial Organization, 2025, vol. 67, issue 2, No 3, 189 pages

Abstract: Abstract This paper presents an analytical model to elucidate the incumbent’s optimal strategy on “vertical repositioning” as a countermeasure against entry. A vertically differentiated market is considered: An entrant establishes its product quality upon entry while incurring quality-establishing costs, and then the incumbent responds by adjusting—increasing or decreasing—its product quality from the original one while bearing some repositioning costs: quality-adjusting costs. Analyses show that the incumbent’s optimal vertical repositioning strategy is determined not only by its initial quality level but also by the cost differential in establishing and adjusting product quality in comparison to the entrant. Results provide the following insights into the dynamic vertical (re)positioning competition: First, an increase in the repositioning costs leads to a decrease in product differentiation (quality difference) between competing firms, which can harm not only the incumbent itself but also the entrant, and ultimately can deter the entry itself. Thus, sufficiently high repositioning costs can serve as an entry-deterrence device. Second, the incumbent would prefer competition of a superior entrant with low costs (if entry is unavoidable), as this can significantly increase vertical product differentiation to benefit the inferior incumbent. Third, higher repositioning costs in reducing the product quality—downward inflexibility—can function as a commitment device for the incumbent to secure a more profitable position by hindering the entrant from challenging the superior position.

Keywords: Entry; Entry-deterrence; Product differentiation; Quality choice; Repositioning (search for similar items in EconPapers)
JEL-codes: C72 D21 D43 L11 L13 M21 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s11151-025-10019-z Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:revind:v:67:y:2025:i:2:d:10.1007_s11151-025-10019-z

Ordering information: This journal article can be ordered from
http://www.springer. ... on/journal/11151/PS2

DOI: 10.1007/s11151-025-10019-z

Access Statistics for this article

Review of Industrial Organization is currently edited by L.J. White

More articles in Review of Industrial Organization from Springer, The Industrial Organization Society Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().