Monopoly, Entry and Market Coverage in a Vertically Differentiated Market

Gina an industry producing a single product of varying qualities within a technologically feasible compact set, we examine the choice of qualities of a monopolist. We focus on the case where the consumers' income distribution is sufficiently wide as to rule out the case of natural monopoly and we show that if legal or economic barriers to entry impose a monopolistic structure, the monopolist will not always serve the whole market no matter how many qualities it is allowed to introduce. A critical condition, depending on income distribution and available range of qualities is identified separating the cases of covered and uncovered markets and we derive the maximum level of fixed cost that will allow for complete market coverage. We also show that there are paremeter values that guarantee that entry is blockaded and the market uncovered at the monopolist's optimally chosen quality levels. Last, we examine the monopolist's optimal strategies in the face of entry when blockaded entry is feasible. We then show that an uncovered market may appear in such cases when the optimal strategy is product relocation, and we show the optimality of such a strategy in some cases. Thus, an uncovered market may arise even in the absence of legal barriers to entry.