Challenges of Existing in a Market as a Small, Low-quality Producer

Challenges of Existing in a Market as a Small, Low-quality Producer This paper explores the strategy of a small firm entering a monopolist's market thereby creating a duopoly market. The small firm avoids competing with the larger, incumbent firm by producing a lower-quality product at a lower price. The model here establishes an equilibrium under a specific set of assumptions and examines how exogenous factors affect prices, qualities and profits. Although the strategy might allow the firm to enter and earn a profit, the market conditions may make this position much less desirable to that of the large firm for several reasons. In the case explored here where tastes for the product are uniformly distributed, the small firm's profit is about six percent of that of the larger firm. The smaller firm is more severely threatened by the entrance of a third firm. Furthermore, even if the smaller firm can cut costs, its position is not well suited for exploiting such increases in efficiencies. Small Business Economics Springer Journals

Challenges of Existing in a Market as a Small, Low-quality Producer

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Kluwer Academic Publishers
Copyright © 2002 by Kluwer Academic Publishers
Business and Management; Management; Microeconomics; Entrepreneurship; Industrial Organization
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