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Would you like to enter first with a low-quality good?

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entryandqualitywp.dvi Would you like to enter first with a low-quality good? Luca Lambertini§ and Piero Tedeschi# § Dipartimento di Scienze Economiche Universita` di Bologna Strada Maggiore 45, 40125 Bologna, Italy fax: 0039-051-2092664; [email protected] # Dipartimento di Statistica Universita` di Milano-Bicocca Dipartimento di Statistica Via Bicocca degli Arcimboldi, 8, 20126 Milano, Italy fax: 0039-02-6473312; [email protected] December 3, 2003 Abstract Using a two-period duopoly model with vertical differentiation, we show that there exists a unique subgame perfect equilibrium where the first entrant supplies a lower quality and gains higher profits than the second entrant. We also prove that this entry sequence is also socially efficient. JEL Classification: C73, D43, L13 Keywords: entry, vertical differentiation 1 Introduction According to the established wisdom concerning vertically differentiated mar- kets, earlier entrants appropriate the high-quality niches, while later entrants fill the remaining lower part of the quality spectrum (Gabszewicz and Thisse, 1979, 1980; Shaked and Sutton, 1982, 1983; Donnenfeld and Weber, 1992; Lehmann, 1997). This is due to two basic assumptions according to which the distribution of cumsumers’ willingness to pay is uniform and the game unravels in a single period. Here, we want to relax the second assumption, by adopting a simple two-period setup, with sequential entry.1 Using a model whose original for- mulation is in Cremer and Thisse (1991), we show that profit incentives drive firms toward a unique subgame perfect equilibrium where the first entrant supplies a lower quality and gains higher profits as compared to the second entrant. Moreover, we also prove that this entry sequence is also socially efficient, in that it entails a higher average quality level than the alternative one. The remainder of the note is structured as follows. The setup is laid out in s

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