Dynamic Entry in Vertically Differentiated Markets

Raphael Auer and Philip Sauré

No 6130, CESifo Working Paper Series from CESifo

Abstract: We develop a model of vertical innovation in which firms incur a market entry cost and choose a unique level of quality. Once established, firms compete for market shares, selling to consumers with heterogeneous tastes for quality. The equilibrium of the pricing game exists and is unique within our setup. Exogenous productivity growth induces firms to enter the market sequentially at the top end of the quality spectrum. A central feature of the model is that optimization problems of consecutive entrants are self-similar so that new firms enter in constant time-intervals and choose qualities that are a constant fraction higher than incumbent qualities. The asymmetries of quality choice, which inevitably arise because the quality spectrum has top and a bottom, is thus overcome by sequential entry. Our main contribution lies in handling these asymmetries.

Keywords: vertical differentiation; product quality; non-homogenous preferences; natural monopoly; endogenous growth; quality ladders (search for similar items in EconPapers)
JEL-codes: A11 D43 L11 L13 O40 (search for similar items in EconPapers)
Date: 2016
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Related works:
Journal Article: Dynamic entry in vertically differentiated markets (2017)
Working Paper: Dynamic Entry in Vertically Differentiated Markets (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_6130

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