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Proliferation and Entry Deterrence in Vertically Differentiated Markets

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  • Liang Lu

    (Centre for Competition Policy and School of Economics, University of East Anglia)

Abstract

We examine the profitability, entry deterrence and welfare effects of proliferation offered by non-cooperative firms competing in quality and price. In a market of one high quality firm and competitive low quality firms, we find that the established high quality firm will not initiate proliferation but may have an incentive to do so if facing entry threats. The proliferation quality is endogenously determined and the industry profit decreases with such proliferation. Moreover, we show that proliferation increases consumer surplus in the same way as entry does. That is, while proliferation to deter entry is anti-competitive, it is not necessarily welfare-reducing.

Suggested Citation

  • Liang Lu, 2015. "Proliferation and Entry Deterrence in Vertically Differentiated Markets," Working Paper series, University of East Anglia, Centre for Competition Policy (CCP) 2015-06, Centre for Competition Policy, University of East Anglia, Norwich, UK..
    • Handle: RePEc:uea:ueaccp:2015_06
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Vertical Differentiation; Proliferation; Entry Deterrence; Welfare;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • 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
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General

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