Moral Hazard as an Entry Barrier

Abstract

Moral hazard, such as arises in a seller's choice of quality of an experience good, can lead to a barrier to entry.In particular, hit-and-run entry is likely to lead to low quality choice, and, if buyers foresee that, they will be unwilling to buy from an entrant.The scale of entry may affect quality incentives, and therefore introductory offers may assure buyers of an entrant's quality, but this cannot happen under constant returns .

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