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Entry and vertical differentiation

Entry and vertical differentiation
Entry and vertical differentiation
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.
entry, duopoly, quantity competition, vertical differentiation, Bayesian learning, Markov perfect equilibrium, experimentation, experience goods
0022-0531
91-125
Bergemann, Dirk
436929ea-1d3f-48d5-bf4f-08ef4a2d74b4
Valimaki, Jusso
7851d540-cc95-4ef0-9a6b-6e95cb72cc41
Bergemann, Dirk
436929ea-1d3f-48d5-bf4f-08ef4a2d74b4
Valimaki, Jusso
7851d540-cc95-4ef0-9a6b-6e95cb72cc41

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

Record type: Article

Abstract

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.

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More information

Published date: 2002
Keywords: entry, duopoly, quantity competition, vertical differentiation, Bayesian learning, Markov perfect equilibrium, experimentation, experience goods

Identifiers

Local EPrints ID: 39676
URI: http://eprints.soton.ac.uk/id/eprint/39676
ISSN: 0022-0531
PURE UUID: 30c7ff6b-598b-4cce-8bea-a0fec6fec161

Catalogue record

Date deposited: 29 Jun 2006
Last modified: 27 Apr 2021 16:43

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