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Product Compatibility as an Strategy to Hinder Entry Deterrence

Guillem Roig

No 15773, Documentos de Trabajo from Universidad del Rosario

Abstract: In many markets, firms produce and sell complementary components that form a product system. This paper studies the effects of compatibility in product advertisement and entry decisions in a differentiated product market. While advertising enhances the ability of consumers to mix and match components closer to their preferences, more advertising does not always generate larger welfare. In my model, an incumbent uses advertising to increase the prospects of market competition with the objective to deter potential entry. However, under some parameters, entry deterrence does not occur when products are made compatible. With compatible products, the incumbent either obtains large benefits from accommodation or equilibria when all consumers are aware of the existence of the available products emerge. In this latter case, the amount of advertising cannot be further expanded to protect the incumbent’s monopolistic position. As a result, policies in favor of compatibility may encourage entry and generate larger levels of advertisement.

Keywords: Product compatibility; Informative advertising; Entry deterrence; Market structure (search for similar items in EconPapers)
JEL-codes: D21 D43 L13 L15 (search for similar items in EconPapers)
Pages: 45
Date: 2017-10-11
New Economics Papers: this item is included in nep-ind, nep-mic, nep-mkt and nep-ore
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