Entry and verticial differentiation

Bergemann, Dirk and Valimaki, Jusso (2002) Entry and verticial differentiation. Journal of Economic Theory, 106, (1), 91-125. (doi:10.1006/jeth.2001.2865).


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Original Publication URL: http://dx.doi.org/10.1006/jeth.2001.2865


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.

Item Type: Article
Digital Object Identifier (DOI): doi:10.1006/jeth.2001.2865
ISSNs: 0022-0531 (print)
Related URLs:
Keywords: entry, duopoly, quantity competition, vertical differentiation, Bayesian learning, Markov perfect equilibrium, experimentation, experience goods
Subjects: H Social Sciences > H Social Sciences (General)
Divisions : University Structure - Pre August 2011 > School of Social Sciences > Economics
ePrint ID: 39676
Accepted Date and Publication Date:
Date Deposited: 29 Jun 2006
Last Modified: 31 Mar 2016 12:09
Entry and Pricing in Vertically Differentiated Markets
Funded by: ESRC National Centre for Research Methods (R000223448)
1 April 2001 to 31 March 2003
URI: http://eprints.soton.ac.uk/id/eprint/39676

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