LIMIT QUALITIES AND ENTRY DETERRENCE

In this article, we investigate how the interplay of competition among incumbents and the magnitude of a potential entrant's setup cost determines the configuration of the array of products to be offered in a perfect Nash equilibrium. We show that incumbents can use limit qualities to deter entry. We also demonstrate that rivalry among incumbents may lead to excessive entry deterrence. Our analysis generates predictions about the correlation between the degree of product differentiation and the size of the entrant's setup costs.