Vertical Product Differentiation, Market Entry, and Welfare

Reisinger, Markus (December 2004): Vertical Product Differentiation, Market Entry, and Welfare. Discussion Papers in Economics 2004-28

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.

• Item Type: Paper (Discussion Paper)
• Keywords: Entry Deterrence ; Price Discrimination ; Vertical Differentiation
• Subjects: Economics; Economics > Discussion Papers in Economics; Economics > Discussion Papers in Economics > Industrial Organization
• Dewey Classification: 300 Social sciences; 300 Social sciences > 330 Wirtschaft
• Journal of Economic Literature classification: D43, L13, L65
• Language: English