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Entry and Vertical Differentiation

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Abstract

This paper analyzes the entry of new products into vertically differentiated markets where an entrant and an incumbent compete in quantities. The value of the new product is initially uncertain and new information is generated through purchases in the market. We derive the (unique) Markov perfect equilibrium of the infinite horizon game under the strong long run average payoff criterion. The qualitative features of the optimal entry strategy are shown to depend exclusively on the relative ranking of established and new products based on current beliefs. Superior products are launched relatively slowly and at high initial prices whereas substitutes for existing products are launched aggressively at low initial prices. The robustness of these results with respect to different model specifications is discussed. Classification-JEL: C72, C73, D43, D83 Keywords: Entry, Duopoly, Quantity Competition, Vertical Differentiation, Bayesian Learning,Markov Perfect Equilibrium, Experimentation, Experience Goods

Suggested Citation

  • Dirk Bergemann & Valimaki Juuso, 2001. "Entry and Vertical Differentiation," Cowles Foundation Discussion Papers 1302, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:1302
    Note: CFP 1056.
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    References listed on IDEAS

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    Cited by:

    1. Krahmer, Daniel, 2003. "Entry and experimentation in oligopolistic markets for experience goods," International Journal of Industrial Organization, Elsevier, vol. 21(8), pages 1201-1213, October.
    2. Hoppe, Heidrun C. & Lehmann-Grube, Ulrich, 2005. "Innovation timing games: a general framework with applications," Journal of Economic Theory, Elsevier, vol. 121(1), pages 30-50, March.
    3. Keller, Godfrey & Rady, Sven, 2020. "Undiscounted bandit games," Games and Economic Behavior, Elsevier, vol. 124(C), pages 43-61.
    4. Alessandro Bonatti, 2008. "Continuous-Time Screening Contracts," 2008 Meeting Papers 493, Society for Economic Dynamics.
    5. Alfranca, Oscar & Lemarie, Stephane, 2003. "Analysing Competition Between Seed Varieties: An Application To Hybrid Corn Seed In France," 2003 Annual meeting, July 27-30, Montreal, Canada 22238, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    6. Weng, Xi, 2015. "Dynamic pricing in the presence of individual learning," Journal of Economic Theory, Elsevier, vol. 155(C), pages 262-299.
    7. Tamini, Lota D., 2012. "Optimal quality choice under uncertainty on market development," MPRA Paper 40845, University Library of Munich, Germany.
    8. Bauner, Christoph & Liu, Zexuan, 2022. "Incumbents’ pricing and nonpricing responses to entry in vertically differentiated markets," Journal of Air Transport Management, Elsevier, vol. 105(C).
    9. Axel Anderson & Luís M. B. Cabral, 2007. "Go for broke or play it safe? Dynamic competition with choice of variance," RAND Journal of Economics, RAND Corporation, vol. 38(3), pages 593-609, September.
    10. Kolb, Aaron M., 2015. "Optimal entry timing," Journal of Economic Theory, Elsevier, vol. 157(C), pages 973-1000.
    11. Krähmer, Daniel, 2002. "Entry and experimentation in oligopolistic markets for experience goods [Markteintritt und Experimentation in oligopolistischen Märkten für Erfahrungsgüter]," Discussion Papers, Research Unit: Market Processes and Governance FS IV 02-13, WZB Berlin Social Science Center.

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    More about this item

    Keywords

    entry; duopoly; quantity competition; vertical differentiation; bayesian learning; markov perfect equilibrium; experimentation; experience goods;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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