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Entry and exit in a vertically differentiated industry

Author

Listed:
  • Silviano Esteve-Pérez

    (University of Valencia)

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

  • Silviano Esteve-Pérez, 2011. "Entry and exit in a vertically differentiated industry," Working Papers 1107, Department of Applied Economics II, Universidad de Valencia.
    • Handle: RePEc:eec:wpaper:1107
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    File URL: http://repecsrv.uv.es/paper/RePEc/pdf/eec_1107.pdf
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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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