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Existing research has identified different firm characteristics that determine an incumbent’s reaction toward market entrants. This study widens the perspective from a firm’s absolute attributes to its relative positioning within its competitive environment. The hypotheses for the empirical analysis are derived from game theoretic models with either vertical or horizontal product differentiation. In each of the two theoretical models two incumbents initially choose very different quality and variety levels, respectively, and move closer to the center when faced by entry of a competitor. From the vertical differentiation model we predict a stronger price reduction by high-quality firms. In our empirical analysis we are using a novel dataset of the high-quality restaurant market in Germany to test the theoretical findings. While the hypotheses with respect to adjustments of prices and varieties are supported, we do not find empirical evidence for the predicted quality adjustment.
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