Vertical Product Differentiation and Entry Deterrence

Stefan Lutz

No 1455, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper studies how the existence of a potential entrant influences an incumbent’s choice of quality in a model of vertical product differentiation and entry. Both firms face fixed set-up costs and quality-dependent costs of production, and compete on quality and price. With identical quality-dependent costs, the incumbent will always deter entry if possible, i.e. if fixed costs are high. Quality will be set at a level lower than the optimal quality set if entry was accommodated. If entry is not blockaded, quality will be set at a level strictly lower than the optimal quality set under monopoly.

Keywords: Entry; Oligopoly; Product Differentiation; Quality Standards (search for similar items in EconPapers)
JEL-codes: L12 L13 L15 (search for similar items in EconPapers)
Date: 1996-08
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Citations: View citations in EconPapers (4)

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Journal Article: Vertical product differentiation and entry deterrence (1997)
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