Entry Deterrence in Durable-Goods Monopoly

Abstract

Some industries support Schumpeter's notion of creative destruction through innovative entrants. Others exhibit a single, persistent technological leadership. This paper explores a durable-goods monopolist threatened by entry via a new generation of the durable good. It is shown that the durability of the good either acts as an entry barrier itself or creates an opportunity for the incumbent firm to deter entry by limit pricing. As a consequence, the industry tends to remain monopolized, with successive generations of the durable good being introduced by the incumbent monopolist. We show that entry deterrence by limit pricing can lead to underinvestment in innovation.