Inviting entrants may help incumbent firms


This paper provides an example that incumbent firms might allow potential entrants to enter a market. The market consists of two sub-markets: a high-end market and a low-end market. (i) If low-quality products are of no value to consumers in the high-end market, (ii) consumers in the low-end market will not be concerned about product quality; and (iii) if the low-end market is relatively small, then the entries of firms into the low-end market would be beneficial to the incumbent firms. To be more specific, entry into a certain market represents a commitment to prevent incumbent firms from fierce competition within the high-end market and guarantees higher profits to the incumbent firms.

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