Working Paper: CEPR ID: DP16165
Authors: Armin Schmutzler; Christian Oertel
Abstract: We analyze entry of a firm with a new and differentiated product into a market with two properties: An existing incumbent has a captive consumer base, and consumers have heterogeneous tastes. The interaction of the share of captive consumers with the degree of taste heterogeneity leads to non-monotone effects of both parameters on entry. In particular, a higher captive share can support entry when heterogeneity is low but not when it is high, and higher taste heterogeneity (i.e., less product substitutability) can impede entry in the presence of captive consumers. Considering these effects together leads to new insights on entry, horizontal product innovation, and price discrimination.
Keywords: entry; captive consumers; price discrimination; product innovation
JEL Codes: L13; L15; D43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| captive consumer share (D16) | market entry feasibility (F23) |
| taste heterogeneity (L15) | market entry feasibility (F23) |
| product substitutability (D10) | market entry feasibility (F23) |