NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Entry, Pricing and Product Design in an Initially Monopolized Market

Steven J. Davis, Kevin M. Murphy, Robert H. Topel

NBER Working Paper No. 8547
Issued in October 2001
NBER Program(s):   IO

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.

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Document Object Identifier (DOI): 10.3386/w8547

Published: Davis, Stephen J., Kevin M. Murphy and Robert H. Topel. "Entry, Pricing, And Product Design In An Initially Monopolized Market," Journal of Political Economy, 2004, v112(2,Part2), S188-S225.

 
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