Entry and Innovation in Vertically Differentiated Markets

Dirk Bergemann and Juuso Välimäki

No 1226, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: This paper analyzes the optimal entry into experience goods markets with vertically differentiated buyers. We consider the case where the value of the new product is imperfectly known, but common to all buyers (common values) as well as the case where the quality is different across buyers (private values). We distinguish between new products that are improvements to existing products and new products that are substitutes. Different types of products have qualitatively distinct diffusion paths. Improvements are introduced slowly relative to the full information case, while substitutes are introduced more aggressively. The slow entry strategy is associated with increasing supply and decreasing prices over time. The reverse pattern holds for an aggressive entry strategy The incentives to innovate display a similar distinction. A firm with a currently inferior product opts for a large but risky innovation, whereas a currently superior producer chooses a smaller but certain innovation.

Keywords: Experience goods; vertical differentiation; entry; innovation (search for similar items in EconPapers)
JEL-codes: D81 D83 (search for similar items in EconPapers)
Pages: 51 pages
Date: 1999-06
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Citations: View citations in EconPapers (1)

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