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Vertical product differentiation and entry deterrence

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  • Stefan Lutz

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.
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Suggested Citation

  • Stefan Lutz, 1997. "Vertical product differentiation and entry deterrence," Journal of Economics, Springer, vol. 65(1), pages 79-102, February.
    • Handle: RePEc:kap:jeczfn:v:65:y:1997:i:1:p:79-102
    DOI: 10.1007/BF01239060
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    References listed on IDEAS

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    1. Lutz, Stefan, 1996. "Vertical Product Differentiation, Quality Standards, and International Trade Policy," CEPR Discussion Papers 1443, C.E.P.R. Discussion Papers.
    2. Anglin, Paul M, 1992. "The Relationship between Models of Horizontal and Vertical Differentiation," Bulletin of Economic Research, Wiley Blackwell, vol. 44(1), pages 1-20, January.
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    6. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, April.
    7. Jaskold Gabszewicz, J. & Thisse, J. -F., 1979. "Price competition, quality and income disparities," Journal of Economic Theory, Elsevier, vol. 20(3), pages 340-359, June.
    8. Donnenfeld, Shabtai & Weber, Shlomo, 1992. "Vertical product differentiation with entry," International Journal of Industrial Organization, Elsevier, vol. 10(3), pages 449-472, September.
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    13. repec:nys:sunysb:95-01 is not listed on IDEAS
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    More about this item

    Keywords

    product differentiation; quality; oligopoly; entry; L12; L13; L15;
    All these keywords.

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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