Vertical Product Differentiation, Entry-Deterrence Strategies, and Entry Qualities

Yong-Hwan Noh and GianCarlo Moschini

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: We analyze the potential entry of a new product into a vertically differentiated market. Here the entry-deterrence strategies of the incumbent firm rely on “limit qualities.” The model assumes quality-dependent marginal production costs and considers sequential quality choices by an incumbent and an entrant. Entry-quality decisions and the entry-deterrence strategies are related to the fixed cost necessary for entry and to the degree of consumers’ taste for quality. We detail the conditions under which the incumbent increases its quality level to deter entry. Quality-dependent marginal production costs in the model entail the possibility of inferior-quality entry as well. Welfare is not necessarily improved when entry is encouraged rather than deterred.

Date: 2006-11-01
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Journal Article: Vertical Product Differentiation, Entry-Deterrence Strategies, and Entry Qualities (2006)
Working Paper: Vertical Product Differentiation, Entry-Deterrence Strategies, and Entry Qualities (2006)
Working Paper: Vertical Product Differentiation, Entry-Deterrence Strategies, and Entry Qualities (2005)
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