Ed Webb

"Do we see monopoly or duopoly? The influence of perception on entry deterrence"

Abstract

It is shown that consumers with limited perception affect market outcomes in radically different ways depending on the form of production cost. Consumers are unable
to discriminate between sufficiently similar goods.

In a vertically differentiated duopoly with sequential quality choice, when quality costs are fixed, entry deterrence becomes easier and more profitable. When costs are marginal, deterrence is more difficult when perceptual limitations are low, but easier when limitations are severe. Incumbent profit is generally lower, although for a narrow range of parameter values it may be higher. For certain parameters, the incumbent firm chooses not to produce and a market is never created.