Strategic Limitation of Market Size and Product Quality for Entry

This paper derives an entrant's optimal choice of quality and market size. We derive a subgame perfect equilibrium of two stage games in which the entrant chooses its product quality and product market size in the first stage and competes with the incumbent in price in the second stage. We find that the entrant's optimal strategy in the first stage involves only the limitation of market size. However, when quality is given, an entrant with lower quality than a critical level does not need to limit market size but an entrant with higher quality than the critical level needs to limit market size. When market size is given, an entrant with a smaller market than a critical size does not need to limit quality but an entrant with a bigger market than the critical level needs to limit quality.