Martin Peitz

"The pro-competitive effects of higher costs of entry"
JEL codes: L13
Keywords: market structure, strategic entry deterrence, vertical product differentiation, natural oligopolies, sunk costs, barriers to entry, competition

Abstract: In an oligopolistic market with vertical product differentiation incumbent firms use sophisticated entry deterring and accommodating strategies. When entry costs are low, firms accommodate entry. For higher entry costs incumbent firms deter entry by producing close substitutes. This leads to intense competition meaning lower price-cost margins and lower industry profits. The result depends on the asymmetry of the market.