Working Paper: NBER ID: w8547
Authors: Steven J. Davis; Kevin M. Murphy; Robert H. Topel
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.
Keywords: No keywords provided
JEL Codes: D43; D42; L13; L12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| entry (Y20) | higher prices for some consumers (D49) |
| entry (Y20) | misallocation of goods (D61) |
| misallocation of goods (D61) | surplus to producers (E23) |
| entry (Y20) | reduced welfare (I38) |
| entry (Y20) | weakened incumbent's pricing strategies (D43) |
| entry (Y20) | incumbent raises prices (E64) |
| incumbent's pricing behavior (D43) | influenced by threat of entry (L13) |
| post-entry product designs (L15) | strengthen market segmentation (D49) |
| strengthen market segmentation (D49) | raise prices (D49) |
| multiproduct monopoly (D42) | better design incentives (D47) |
| coordination among products (L15) | better extraction of surplus (D46) |