Add-On Service Quality and Preemption With Non-Savvy Consumers

This paper examines the impact of the presence of non-savvy consumers on firms' entry incentives in durable goods markets. In the durable goods markets, firms provide vertically-differentiated add-on services to consumers. We firstly show that the price of a durable good with high quality add-on services is lower (resp. higher) than that with low quality add-on services when the proportion of non-savvy consumers in the population is high (resp. low). We then show that a firm that supplies a durable good with high quality add-on services enters earlier than that with low quality add-on services, irrespective of the proportion of non-savvy consumers. In addition, when the proportion of non-savvy consumers is high, each firm has a preemptive incentive such that the entry timing of a firm with high quality add-on services into the market becomes earlier than that when savvy consumers are prevalent.