Entry and exit in a vertically differentiated industry

Silviano Esteve-Pérez

Acta Oeconomica, 2011, vol. 61, issue 4, 413-440

Abstract: This paper presents a duopoly model of firm rivalry in a vertically differentiated industry when market dynamics is explicitly accounted for. It shows how the interplay between demand (degree of product differentiation, demand elasticity) and cost (fixed and quality costs) factors determine firms’ relative strength when quality is irreversible. The main strategic choices are product quality, price and the timing of entry and exit. Further, firms incur sunk quality costs at time of entry and operating fixed costs of maintaining quality. Although the low quality firm may outlast its rival in the declining phase, both firms wish to be the “quality leader”.

Keywords: entry; exit; vertical product differentiation (search for similar items in EconPapers)
JEL-codes: L11 L13 (search for similar items in EconPapers)
Date: 2011
Note: I would like to thank Michael Waterson, Morten Hviid, Norman J. Ireland and Ken Simons for their comments and suggestions. Financial support from the Spanish Ministry of Science and Technology (Project number ECO2008-04059/ECON) and from Generalitat Valenciana (Project reference GVPROMETEO2009-098) is gratefully acknowledged. The usual disclaimer applies.
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Citations: View citations in EconPapers (1)

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