This paper provides a new theoretical justification for entry to raise incumbent’s profit. In an industry with product differentiation and when firms use different strategic variables, we show that entry by an additional price setter may end up benefitting another price setting incumbent. This is due to the response of existing quantity setters, who contract their output after entry. Such reduction in output, which creates demand for the price setters, may more than compensate the reduction in price that is brought about by entry, provided that the products are not sufficiently differentiated.
|Number of pages||22|
|Journal||Journal of Economics/ Zeitschrift fur Nationalokonomie|
|Early online date||20 Jul 2022|
|Publication status||Published - Jan 2023|
- Profit raising entry
- Product differentiation