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2006

Iowa State University

CARD Working Papers

Entry deterrence

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Vertical Product Differentiation, Entry-Deterrence Strategies, And Entry Qualities, Yong-Hwan Noh, Giancarlo Moschini Apr 2006

Vertical Product Differentiation, Entry-Deterrence Strategies, And Entry Qualities, Yong-Hwan Noh, Giancarlo Moschini

CARD Working Papers

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 ...