Skip to main content
Log in

Product innovation and contestability

  • Published:
De Economist Aims and scope Submit manuscript

Summary

This article deals with the introduction of product innovation in a contestable market model. Investment contestability describes a benchmark case of competition by introducing sunk entry-deterring investment in a free entry framework. Aside from careful price setting, suppliers adopt investment in product quality in order to deter entry. Zero-profit pricing and increased quality point to a partial second-best outcome of market behaviour.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Bain, J.S.,Barriers to New Competition, Cambridge, Mass., 1956.

  • Baumol, W.J., ‘Contestable Markets: An Uprising in the Theory of Industry Structure,’American Economic Review, 72 (1982), pp. 1–15.

    Google Scholar 

  • Baumol, W.J. and R.D. Willig, ‘Fixed Costs, Sunk Costs, Entry Barriers, and Sustainability of Monopoly,’Quarterly Journal of Economics, 95 (1981), pp. 405–432.

    Google Scholar 

  • Baumol, W.J., J.C. Panzar and R.D. Willig,Contestable Markets and the Theory of Industry Structure, New York, 1982.

  • Brock, W.A., ‘Contestable Markets: An Uprising in the Theory of Industry Structure: A Review Article,'Journal of Political Economy, 91 (1983), pp. 1055–1066.

    Google Scholar 

  • Bulow, J.I., J.D. Geanakopolos and P.D. Klemperer, ‘Multimarket Oligopoly: Strategic Substitutes and Complements,’Journal of Political Economy, 93 (1985), pp. 488–511.

    Google Scholar 

  • Cairns, R.D. and D. Mahabir, ‘Contestability: A Revisionist View,’Economica, 55 (1988), pp. 269–276.

    Google Scholar 

  • Caves, R.E. and M.E. Porter, ‘From Entry Barriers to Mobility Barriers: Conjectural Decisions and Contrived Deterrence to New Competition,’Quarterly Journal of Economics, 91 (1977), pp. 241–261.

    Google Scholar 

  • Chamberlin, E.H.,The Theory of Monopolistic Competition, Cambridge, Mass., 1933.

  • Clark, J.B.,Essentials of Economic Theory, London, 1915.

  • Clark, J.M., ‘Toward a Concept of Workable Competition,'American Economic Review, 30 (1940), pp. 241–256.

    Google Scholar 

  • Dasgupta, P. and J.E. Stiglitz, ‘Industrial Structure and the Nature of Innovative Activity,’Economic Journal, 90 (1980), pp. 266–293.

    Google Scholar 

  • Dasgupta, P. and J.E. Stiglitz, ‘Potential Competition, Actual Competition and Economic Welfare,’European Economic Review, 32 (1988), pp. 569–577.

    Google Scholar 

  • Deaton, A. and J. Muellbauer,Economics and Consumer Behavior, Cambridge, 1980.

  • Demsetz, H., ‘Why Regulate Utilities,’968, reprinted in: Y. Brozen (ed.),The Competitive Economy: Selected Readings, Morristown, N.J., 1975, pp. 15–20.

  • Farrell, J., ‘How Effective is Potential Competition?,’Economics Letters, 20 (1986), pp. 67–70.

    Google Scholar 

  • Fudenberg, D., R. Gilbert, J.E. Stiglitz and J. Tirole, ‘Preemption, Leapfrogging and Competition in Patent Races,’European Economic Review, 22 (1983), pp. 3–31.

    Google Scholar 

  • Gabszewicz, J.J. and J.F. Thisse, ‘Entry (and Exit) in a Differentiated Industry,’Journal of Economic Theory, 22 (1980), pp. 327–338.

    Google Scholar 

  • Gilbert, R., ‘Preemptive Competition,’ in: J.E. Stiglitz and G.F. Mathewson (eds.),New Developments in the Analysis of Market Structure, Cambridge, Mass., 1986, pp. 89–123.

  • Gilbert, R. and D. Newberry, ‘Preemptive Patenting and the Persistence of Monopoly,'American Economic Review, 72 (1982), pp. 514–526.

    Google Scholar 

  • Green, C., ‘Industrial Organization Paradigms, Empirical Evidence, and the Economic Case for Competitive Policy,’Canadian Journal of Economics, 20 (1987), pp. 482–505.

    Google Scholar 

  • Grossman, S., ‘Nash Equilibrium and the Industrial Organization of Markets with Large Fixed Costs,’Econometrica, 49 (1988), pp. 1149–1172.

    Google Scholar 

  • Harrod, R.,Economic Essays, London, 1953, pp. 139–187.

  • Hotelling, H., ‘Stability in Competition,’Economic Journal, 39 (1929), pp. 446–452.

    Google Scholar 

  • Kamien, M.I. and N.L. Schwartz,Market Structure and Innovation, Cambridge, 1982.

  • Kihlstrom, R.E. and D. Levhari, ‘Quality, Regulation and Efficiency,’Kyklos, 30 (1977), pp. 214–234.

    Google Scholar 

  • Kim, J. S., ‘Optimal Price-Quality Schedules and Sustainability,’Journal of Industrial Economics, 36 (1987), pp. 231–244.

    Google Scholar 

  • Knieps, G. and I. Vogelsang, ‘The Sustainability Concept under Alternative Behavioral Assumptions,’Bell Journal of Economics, 13 (1982), pp. 234–241.

    Google Scholar 

  • Lancaster, K., ‘A New Approach to Consumer Theory,’Journal of Political Economy, 74 (1966), pp. 132–157.

    Google Scholar 

  • Lancaster, K., Variety,Equity and Efficiency, New York, 1979.

  • Martin, S., ‘Sunk Costs, Financial Markets, and Contestability,’European Economic Review, 33 (1989), pp. 1089–1113.

    Google Scholar 

  • Maskin, E. and J. Tirole, ‘A Theory of Dynamic Oligopoly, I: Overview and Quantity Competition with Large Fixed Costs,’Econometrica, 56 (1988), pp. 549–569.

    Google Scholar 

  • Mills, D.E., ‘Preemptive Investment Timing,’Rand Journal of Economics, 19 (1988), pp. 114–122.

    Google Scholar 

  • Pinto, B., ‘Repeated Games and the ‘Reciprocal Dumping” Model of Trade,’Journal of International Economics, 20 (1986), pp. 357–366.

    Google Scholar 

  • Raa, T. ten,A Theory of Value and Industry Structure, Ph.D. thesis, New York University, 1980.

  • Rashid, S., ‘Quality in Contestable Markets: A Historical Problem,’Quarterly Journal of Economics, 103 (1988), pp. 245–249.

    Google Scholar 

  • Robinson, J.,Economics of Imperfect Competition, London, 1938.

  • Scherer, F.M.,Industrial Market Structure and Economic Performance, Chicago, 1979.

  • Schwartz, M. and R.J. Reynolds, ‘Contestable Markets: An Uprising in the Theory of Industry Structure: Comment,’American Economic Review, 73 (1983), pp. 488–490.

    Google Scholar 

  • Shepherd, W.G.,The Economics of Industrial Organization, London, Englewood Cliffs, 1979.

    Google Scholar 

  • Shepherd, W.G., ‘Contestability vs. Competition,'American Economic Review, 74 (1984), pp. 572–587

    Google Scholar 

  • Sosnick, S.H., ‘A Critique of Concepts of Workable Competition,’Quarterly Journal of Economics, 72 (1958), pp. 380–423.

    Google Scholar 

  • Stigler, G.J.,The Organization of Industry, Homewood, Ill., 1968.

  • Stiglitz, J.E., ‘Technological Change, Sunk Costs, and Competition,'Brookings Papers on Economic Activity, 1987, pp. 883–937.

  • Wegberg, M. van and Witteloostuijn, A. van, ‘Multimarket Modeling in Industrial Organization, Part I: Bertrand Games with Entry Costs,’ RResearch Memorandum RM 89-028, University of Limburg, 1989.

  • Witteloostuijn, A. van, ‘Entry and Exit Barriers: A Note on the Compatibility of Free Entry and Costly Exit,’Economic Research Report 88-40, New York University, Department of Economics, C.V. Starr Center For Applied Economics, 1988.

  • Witteloostuijn, A. van, ‘Investment Contestability and Average Cost Reduction,’European Journal of Political Economy, 6 (1990), forthcoming.

  • Witteloostuijn, A. van and Maks, J.A.H., ‘Workable Competition and the Barrier Market,’European Journal of Political Economy, 4 (1988), pp. 117–135.

    Google Scholar 

  • Witteloostuijn, A. van and M. van Wegberg, ‘Product Quality Innovation and Entry Deterrence,’Research Memorandum RM 88-019, University of Limburg, 1988.

Download references

Author information

Authors and Affiliations

Authors

Additional information

The author is very grateful for the support of Professor W.J. Baumol, The C.V. Starr Center for Research in Applied Economics at New York University, The Dutch Organisation of Scientific Research and an anonymous referee. Of course, the usual disclaimer applies.

Rights and permissions

Reprints and permissions

About this article

Cite this article

van Witteloostuijn, A. Product innovation and contestability. De Economist 138, 181–196 (1990). https://doi.org/10.1007/BF01329990

Download citation

  • Issue Date:

  • DOI: https://doi.org/10.1007/BF01329990

Keywords

Navigation