*Corresponding Author: Tel: 9841153292 E-mail: phuyal_ram5@yahoo.com RETRUD-11 Conference Proceedings Third International Conference on Addressing Climate Change for Sustainable Development through Up-Scaling Renewable Energy Technologies http://www.retrudconference.com Strategic Entry Deterrence with New Technology under Quality Regulation in a Vertically Differentiated Industry a Dr. Ram Kumar Phuyal , b Professor Dr. Sang-Ho Lee ab Department of Economics , Chonnam National University , Republic of Korea Abstract This paper attempts to explore the role of entry cost on the strategic entry deterrence considering technology as a key deterrence device of incumbent in a vertically differentiated duopoly industry. Upon endorsement of new technology, we derived the explicit solutions with quality regulation and without quality regulation to understand the strategic interaction between entry costs and new technology to determine the limit quality scale of the incumbent. Finally, we obtained that the maintenance of minimum quality standards can increase welfare under moderate entry cost in certain zones, but it does not necessarily improve social welfare in all the scenarios. Keywords: Entry deterrence; new technology; Minimum quality standards; Vertical product differentiation 1. INTRODUCTION Since the emergence of research on the vertical product differentiation (VPD), studies on quality choices are of paramount importance in industries where quality regulation is critical. Without considering quality regulation, Gabszewicz and Thisse (1980) studied the impact of entry in a VPD model, and Shaked and Sutton (1982) showed that quality differences relax price competition, in which one firm selects the high-end quality and the other chooses the low-end quality to lessen price competition. However, under quality regulation, the degree of product differentiation will be restricted and thus, the effect on competition should be reexamined. Many pioneering works have been generalized in different directions since the seminal contributions of Besanko, Donnenfeld, and White (1988), who explored minimum quality standard (MQS) in alleviating monopolistic quality distortions. It has been well-known that an MQS typically increases welfare in the duopoly model by forcing the entrant to set a higher level of quality than it otherwise would. When the two producers set more similar levels of product quality, more intense price competition ensures, which increases consumer welfare. For example, Ronnen (1991) demonstrated how quality levels increase with an MQS under a vertically differentiated duopoly with a fixed cost of quality improvement under Bertrand competition. He showed that a quality requirement can benefit all consumers. Furthermore, it turns out to be crucial for a positive welfare effect of MQS that it narrows the quality gap between the products. Meanwhile, the entry deterrence strategy of incumbents has been a topic of interest, examining how the incumbent’s choice of product quality depends on the size of the entrant’s setup costs. Hung and Schmitt (1988) altered the VPD framework by considering sequential entry and subsequent threat of entry, and showed that the threat of entry induces the incumbent to provide a lower product quality than technological maximum quality. Similarly, Donnenfeld and Weber (1995) investigated how product competition among duopolistic incumbents and a potential entrant’s fixed entry cost affect entry-deterrence strategies and product qualities. They showed a positive correlation between the degree of product differentiation among the incumbents and the size of fixed cost, and predicted that the smaller the