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Vertical Product Differentiation, Market Entry, and Welfare

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  • Reisinger, Markus

Abstract

This paper analyses a model of vertical product differentiation with one incumbent and one entrant firm. It is shown that if firms can produce only one quality level welfare in this entry game can be lower than in monopoly. This is the case if qualities are strategic complements because the incumbent may distort its quality downwards. If firms can produce a quality range and practice non-linear pricing welfare in case of entry deterrence is higher than in monopoly because the incumbent enlarges its product line. If entry is accommodated consumer rent increases but the consequences on welfare are ambiguous.

Suggested Citation

  • Reisinger, Markus, 2004. "Vertical Product Differentiation, Market Entry, and Welfare," Discussion Papers in Economics 479, University of Munich, Department of Economics.
    • Handle: RePEc:lmu:muenec:479
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    File URL: https://epub.ub.uni-muenchen.de/479/1/munichvertdiff.pdf
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    References listed on IDEAS

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    Cited by:

    1. Stoneman, Paul, 2011. "Soft Innovation: Economics, Product Aesthetics, and the Creative Industries," OUP Catalogue, Oxford University Press, number 9780199697021.

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    More about this item

    Keywords

    Entry Deterrence ; Price Discrimination ; Vertical Differentiation;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics

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