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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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.
|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
|Date Deposited:||29 Jun 2006|
|Last Modified:||28 Mar 2014 15:26|
Entry and Pricing in Vertically Differentiated Markets
Funded by: ESRC (R000223448)
1 April 2001 to 31 March 2003
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