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Challenging the incumbent: entry in markets with captive consumers and taste heterogeneity


Oertel, Christian; Schmutzler, Armin (2021). Challenging the incumbent: entry in markets with captive consumers and taste heterogeneity. Working paper series / Department of Economics 386, University of Zurich.

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 all 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.

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 all 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.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Department of Economics
Dewey Decimal Classification:330 Economics
JEL Classification:L13, L40
Uncontrolled Keywords:Entry, captive consumers, asymmetric competition, product innovation
Language:English
Date:May 2021
Deposited On:17 May 2021 12:42
Last Modified:17 May 2021 12:42
Series Name:Working paper series / Department of Economics
Number of Pages:35
ISSN:1664-705X
OA Status:Green
Official URL:https://www.econ.uzh.ch/en/research/workingpapers.html?paper-id=1068

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