The Strategic Entry Behavior Choices of Firms under Minimum Quality Standard
Author(s)
Huishuang He
Affiliation(s)
Management and Economic College, North China University of Water Resources and Electric Power, Zhengzhou, China.
Management and Economic College, North China University of Water Resources and Electric Power, Zhengzhou, China.
ABSTRACT
In order to analyze the strategic entry behavior choices of firms under minimum quality standard, a basic model is made under the endogenous minimum quality standard. An industry’s competitiveness and the level of performance tend to be subject to the entry conditions and the ease of entry. For entrants, the basic entry technological constraint is the minimum quality standard. In differentiated products markets, when there is no minimum quality standard and the entry cost is small, the entrant’ profit is the same, whether they choose the high quality or low quality to enter the product market. While in the case of endogenous minimum quality standard, the incumbent may choose to produce low quality products, and the entrant may choose to produce high quality products, which lead to the lack of competition in product markets. Therefore, government should create an open and competitive market environment and efficient policy guidance for firms.
In order to analyze the strategic entry behavior choices of firms under minimum quality standard, a basic model is made under the endogenous minimum quality standard. An industry’s competitiveness and the level of performance tend to be subject to the entry conditions and the ease of entry. For entrants, the basic entry technological constraint is the minimum quality standard. In differentiated products markets, when there is no minimum quality standard and the entry cost is small, the entrant’ profit is the same, whether they choose the high quality or low quality to enter the product market. While in the case of endogenous minimum quality standard, the incumbent may choose to produce low quality products, and the entrant may choose to produce high quality products, which lead to the lack of competition in product markets. Therefore, government should create an open and competitive market environment and efficient policy guidance for firms.
Cite this paper
He, H. (2014) The Strategic Entry Behavior Choices of Firms under Minimum Quality Standard. Theoretical Economics Letters, 4, 777-786. doi: 10.4236/tel.2014.49098.
He, H. (2014) The Strategic Entry Behavior Choices of Firms under Minimum Quality Standard. Theoretical Economics Letters, 4, 777-786. doi: 10.4236/tel.2014.49098.
References
[1] Bonnisseau, J.-M. and Lahmandi-Ayed, R. (2006) Vertical Differentiation: Multiproduct Strategy to Face Entry? Topics in Theoretical Economics, 6, 1282. [2] Donnenfeld, S. and Weber, S. (1995) Limit Qualities and Entry Deterrence. The RAND Journal of Economics, 26, 113- 130. http://dx.doi.org/10.2307/2556038 [3] Dixit, A. (1979) A Model of Duopoly Suggesting a Theory of Entry Barriers. The Bell Journal of Economics, 10, 20-32. http://dx.doi.org/10.2307/3003317 [4] Schmalensee, R. (1978) Entry Deterrence in the Ready-to-Eat Breakfast Cereal Industry. The Bell Journal of Economics, 9, 305-327. http://dx.doi.org/10.2307/3003584 [5] Pezzino, M. (2006) Minimum Quality Standards with More than Two Firms under Cournot Competition. Economics Discussion Paper EDP-0613, The University of Manchester, Manchester. [6] Garella, P.G. (2006) “Innocuous” Minimum Quality Standards. Economic Letters, 92, 368-374.
http://dx.doi.org/10.1016/j.econlet.2006.03.022 [7] Ecchia, G., Lambertini, L. and Tampieri, A. (2013) Minimum Quality Standards in Hedonic Markets with Environmental Externalities. Environmental Modeling & Assessment, 18, 319-323.
http://dx.doi.org/10.1007/s10666-012-9345-z [8] Nagurney, A. and Li, D. (2014) Equilibria and Dynamics of Supply Chain Network Competition with Information Asymmetry in Quality and Minimum Quality Standards. Computational Management Science, 11, 285-315. http://dx.doi.org/10.1007/s10287-014-0216-8 [9] Cesi, B. (2010) Mergers under Endogenous Minimum Quality Standard: A Note. Economics Bulletin, 30, 3260-3266. [10] Mussa, M. and Rosen, S. (1978) Monopoly and Product Quality. Journal of Economic Theory, 18, 301-317. http://dx.doi.org/10.1016/0022-0531(78)90085-6
[1] Bonnisseau, J.-M. and Lahmandi-Ayed, R. (2006) Vertical Differentiation: Multiproduct Strategy to Face Entry? Topics in Theoretical Economics, 6, 1282. [2] Donnenfeld, S. and Weber, S. (1995) Limit Qualities and Entry Deterrence. The RAND Journal of Economics, 26, 113- 130. http://dx.doi.org/10.2307/2556038 [3] Dixit, A. (1979) A Model of Duopoly Suggesting a Theory of Entry Barriers. The Bell Journal of Economics, 10, 20-32. http://dx.doi.org/10.2307/3003317 [4] Schmalensee, R. (1978) Entry Deterrence in the Ready-to-Eat Breakfast Cereal Industry. The Bell Journal of Economics, 9, 305-327. http://dx.doi.org/10.2307/3003584 [5] Pezzino, M. (2006) Minimum Quality Standards with More than Two Firms under Cournot Competition. Economics Discussion Paper EDP-0613, The University of Manchester, Manchester. [6] Garella, P.G. (2006) “Innocuous” Minimum Quality Standards. Economic Letters, 92, 368-374.
http://dx.doi.org/10.1016/j.econlet.2006.03.022 [7] Ecchia, G., Lambertini, L. and Tampieri, A. (2013) Minimum Quality Standards in Hedonic Markets with Environmental Externalities. Environmental Modeling & Assessment, 18, 319-323.
http://dx.doi.org/10.1007/s10666-012-9345-z [8] Nagurney, A. and Li, D. (2014) Equilibria and Dynamics of Supply Chain Network Competition with Information Asymmetry in Quality and Minimum Quality Standards. Computational Management Science, 11, 285-315. http://dx.doi.org/10.1007/s10287-014-0216-8 [9] Cesi, B. (2010) Mergers under Endogenous Minimum Quality Standard: A Note. Economics Bulletin, 30, 3260-3266. [10] Mussa, M. and Rosen, S. (1978) Monopoly and Product Quality. Journal of Economic Theory, 18, 301-317. http://dx.doi.org/10.1016/0022-0531(78)90085-6