Entry, Pricing, and Product Design in an Initially Monopolized Market

Abstract

We analyze entry, pricing and product design in a model with differentiated products. Under plausible conditions, entry into an initially monopolized market leads to higher prices for some, possibly all, consumers. Entry can induce a misallocation of goods to consumers, segment the market in a way that transfers surplus to producers and undermine aggressive pricing by the incumbent. Post entry, firms have strong incentives to modify product designs so as to raise price by strengthening market segmentation.Firms may also forego socially beneficial product improvements in the post-entry equilibrium, because they intensify price competition too much. Multi-product monopoly can lead to better design incentives than the non-cooperative pricing that prevails under competition.

Stakeholder Orientation and Market Impact: Evidence from India

“…Mixed price responses have been found to the entry by a new antiulcer prescription drugs: incumbent prices rise with entry by a distant therapeutic substitute but fall if the entrant good is a close substitute (Perloff et al 2005). This mixed pattern is consistent with Davis et al (2004) who predict incumbents' response will be a function of firms' relative positions in product space, consumer preferences, and distribution of consumer types. From this perspective, a straight-forward prediction would be that if a firm enters the low-end of the market, then the low-end incumbents should respond with further lowering of the prices of their products.…”

Price and variety in the Salop model

“…Fourth, if consumers do not buy any products when their desired brands are not available, an increase in available varieties can generate additional demand margins and therefore lead to higher prices (Chen & Riordan, 2007, 2008). Fifth, when sellers can strategically design their products to affect consumer valuations, the entry of new products can lead to a softening of price competition (Davis et al, 2004; González‐Maestre & Granero 2018).…”

“…While other models have shown price‐increasing competition, this result arises solely from strategic responses among firms in these models, regardless of the details of model structures, such as imperfect information (Janssen & Moraga‐González, 2004; Satterthwaite, 1979; Schulz & Stahl, 1996; Stiglitz, 1987), mixed strategies (Rosenthal, 1980), a quasiconcave profit function (Amir & Lambson, 2000), a no‐purchase assumption (Chen & Riordan, 2007, 2008), and product design (Davis et al, 2004; González‐Maestre & Granero, 2018). Our striking result arises from strategic responses between consumers and firms; consumers decrease their information provision in response to an increased number of product varieties, which in turn softens price competition.…”