Preemptive Spacing With Vertical Differentiation When Input Quality is of Inelastic Supply

Mark R. Frascatore

Australian Economic Papers, 2000, vol. 39, issue 2, 159-172

Abstract: This paper examines a model of vertical differentiation in which an incumbent engages in preemptive spacing to prevent entry. Input quality is of fixed supply, and the incumbent prevents high‐end entry by producing a product with all the quality available. It also commits to the production of a minimum‐quality product to deter low‐end entry. There is no entry in equilibrium, and the incumbent monopolist chooses to sell only its high‐quality product. Commitment to the production of the minimum‐quality product is used merely as a credible threat to vigorously compete should an entrant also produce a minimum‐quality product.

Date: 2000
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