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Entry and exit in a vertically differentiated industry

Author

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  • S. Esteve-Pérez

    (University of Valencia, Department of Applied Economics II, Avenida de los Naranjos, S/N 46022 Valencia, Spain)

Abstract

This paper presents a duopoly model of firm rivalry in a vertically differentiated industry when market dynamics is explicitly accounted for. It shows how the interplay between demand (degree of product differentiation, demand elasticity) and cost (fixed and quality costs) factors determine firms’ relative strength when quality is irreversible. The main strategic choices are product quality, price and the timing of entry and exit. Further, firms incur sunk quality costs at time of entry and operating fixed costs of maintaining quality. Although the low quality firm may outlast its rival in the declining phase, both firms wish to be the “quality leader”.

Suggested Citation

  • S. Esteve-Pérez, 2011. "Entry and exit in a vertically differentiated industry," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 61(4), pages 413-440, December.
    • Handle: RePEc:aka:aoecon:v:61:y:2011:i:4:p:413-440
    Note: I would like to thank Michael Waterson, Morten Hviid, Norman J. Ireland and Ken Simons for their comments and suggestions. Financial support from the Spanish Ministry of Science and Technology (Project number ECO2008-04059/ECON) and from Generalitat Valenciana (Project reference GVPROMETEO2009-098) is gratefully acknowledged. The usual disclaimer applies.
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    References listed on IDEAS

    as
    1. Esteve-Perez, Silviano, 2005. "Exit with vertical product differentiation," International Journal of Industrial Organization, Elsevier, vol. 23(3-4), pages 227-247, April.
    2. Ulrich Lehmann-Grube, 1997. "Strategic Choice of Quality When Quality is Costly: The Persistence of the High-Quality Advantage," RAND Journal of Economics, The RAND Corporation, vol. 28(2), pages 372-384, Summer.
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    Cited by:

    1. Chen, Jihui, 2024. "The pricing and quality effects of network structure choice: Evidence from American airlines’ international route cancellations," Journal of Air Transport Management, Elsevier, vol. 114(C).

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    More about this item

    Keywords

    entry; exit; vertical product differentiation;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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