Entry Deterrence

Considering the number of new product introductions and available product varieties today, the practice of product proliferation is visibly evident in many diverse industries. Given its prevalence in practice, understanding the determinants and implications of firm proliferation strategies clearly has important managerial relevance. Previous theoretical research has identified three primary effects of a proliferation strategy: (1) a broad product line can increase the overall demand faced by the firm, (2) a broad product line can affect supply by increasing costs, and (3) broad product lines can have strategic consequences (e.g., long product lines can deter entry, thereby allowing an incumbent firm to raise prices). However, despite the theoretical interest in this common business practice, there has been very little empirical research on this topic. Moreover, no empirical study has simultaneously considered all three of the possible effects associated with a proliferation strategy...

Excess capacity is observed in many markets especially those where a substantial initial investment is required. The theoretical literature often explains this feature by strategic attempts to deter entry or to limit new entrants' market shares but the empirical evidence for such a rationale is mixed. Moreover, excess capacity has also been observed in experimental studies on capacityconstrained games where there is no entry (and therefore no entry-deterrence motive). This paper explores experimentally another rationale for excess capacity: rather than (in addition to) being a threat to (potential) entrants, excess capacity held by incumbents may constitute a valuable option to reap extra gains from competition with an inexperienced entrant, if he turns out to makes a mistake. In our experimental design we used the level of experience (the number of periods played) as a proxy for the level of rationality and matched subjects with different levels of experience. We find evidence of excess capacity decreasing with opponent's experience.

This paper develops a new approach to testing for strategic entry deterrence and applies it to the behavior of pharmaceutical incumbents before patent expiration. It examines a cross section of markets, determining whether behavior is nonmonotonic in market size. Under some conditions, investment levels will be monotone in market size if firms do not invest to deter entry. Strategic investments to deter entry, however, may result in nonmonotonic investment because they are unnecessary in small markets, and impossible in large ones. Consistent with an entry-deterrence motivation is the finding that incumbents in medium-sized markets advertise less prior to patent expiration. (JEL D92, G31, L11, L21, L65)

We consider an incumbent who operates in two independent markets and has private information about his production cost. In one of the markets, there is a potential entrant o¤ering a di¤erentiated product. The most reasonable perfect bayesian equilibrium is either the least cost separating equilibrium or the pooling equilibrium where both types of incumbents set the low cost monopoly prices. The equilibrium may involve a downward distortion in both markets pre-entry prices. This distortion is increasing with the discount factor, the degree of product substitutability and the e¢ ciency of the entrant. An implication of our model for international trade policy is that a lower price in the foreign market is neither a necessary nor a su¢ cient condition for the existence of entry deterrence in the foreign market.

In this paper we examine a model of electoral competition with entry costs, where several established parties compete against each other under the threat of potential entry. Assuming single-peakedness of the distribution of voters' ideal points, we show that, if there are two established parties, an equilibrium always exists and is unique, and demonstrate that the Hotelling-Downs and the Smithies-Palfrey equilibria represent special cases of the equilibrium in our model. If there are more than two established parties, an equilibrium is always unique and there exists an upper bound on the values of entry cost which guarantee the existence of an equilibrium. an anonymous referee for their very useful suggestions.

We extend the literature on exclusive dealing by allowing the incumbent and the potential entrant to merge. This uncovers new effects. First, exclusive deals can be used to improve the incumbent’s bargaining position in the merger negotiation. Second, the incumbent finds it easier to elicit the buyer’s acceptance than in the case where entry can occur only by installing new capacity. Third, exclusive dealing reduces welfare because (i) it may trigger entry through merger whereas de novo entry would be socially optimal, and (ii) it may deter entry altogether. Finally, we show that when exclusive deals include a commitment on future prices they will increase welfare.

This paper characterizes equilibrium outcomes of extensive form games with incomplete in-formation in which players sign renegotiable contracts with third parties. Our aim is to under-stand the extent to which third-party contracts can be used as commitment devices when it is im-possible to commit not to renegotiate them. We characterize renegotiation-proof contracts and strategies for extensive form games with incomplete information and apply our results to two-stage games. If contracts are observable, then the second mover obtains the best possible payoff given that she plays an incentive compatible and renegotiation-proof strategy and the first mover best responds. If contracts are unobservable, then any Bayesian Nash equilibrium outcome of the original game in which the second mover plays an incentive compatible and renegotiation-proof strategy can be supported. We apply our results to Stackelberg competition and show that renegotiation-proofness imposes a very simple restrictio...

Past allocations of coal blocks, in India, being marred with controversies on the grounds of being arbitrary and discretionary led to the de-allotment of 204 coal blocks by the Supreme Court in 2014. Since then, auctions and competitive bidding were introduced in the allocation of coal blocks. Now bidder collusion is a pervasive problem and has been addressed throughout theoretical and empirical academic literature. In auctions, bidders may set up a cartel, or a bidding ring, with the aim of increasing their profit at the expense of the seller and ultimately lower the efficiency of resource allocation. This paper makes theoretical comments on the auction format determined by the Government of India, based on the current regulations and stipulations, regarding it being collusion-proof. It is observed that the prior-allottee (PA) firms face a higher effective entry cost due to the levy component than the new-allottee (NA) firms. This creates a contradictory situation. Without this skewed cost distribution, the PA firms have an incentive to collude against the NA firms whereas with this differential treatment the NA firms have an incentive to collude against the PA firms. This calls for empirical investigation into the optimality of entry costs.

Keywords; coal block auction, collusion in auctions, optimal entry cost, entry deterrence.

Supervisor - Dr. Soumendu Sarkar, Assistant Professor, Department of Policy Studies, TERI University.

This paper investigates how an incumbent monopolist can weaken potential rivals or deter entry in the output market by manipulating the access of these rivals in the input market. We analyse two polar cases. In the first one, the input market is assumed to be competitive with the input being supplied inelastically. We show that this situation opens the door to entry deterrence. Then, we assume that the input is supplied by a single seller who chooses the input price. In this case, we show that entry deterrence can be reached only through merger with the seller of the input.

We show the effects of entry by a non-innovating firm on the innovating firms' incentive for undertaking cooperative R&D, highlighting the impliations of knowledge spillover. Entry by a non-innovating firm may either increase or decrease the incentive for cooperative R&D comparted to no entry, depending on the innovating and the non-innovating firms' gains from knowledge spillover. The entry deterrence motive,

This paper provides a survey on studies that analyze the macroeconomic effects of intellectual property rights (IPR). The first part of this paper introduces different patent-policy instruments and reviews their effects on R&D and economic growth. This part also discusses the distortionary effects and distributional consequences of IPR protection as well as empirical evidence on the effects of patent rights. Then, the second part considers the international aspects of IPR protection. In summary, this survey draws the following conclusions from the literature. Firstly, different patent-policy instruments have different effects on R&D and growth. Secondly, there is empirical evidence supporting a positive relationship between IPR protection and innovation, but the evidence is stronger for developed countries than for developing countries. Thirdly, the optimal level of IPR protection should tradeoff the social benefits of enhanced innovation against the social costs of multiple distort...

We extend the basic chain-store game to the two-incumbent case. A highly stylized model is developed to analyze incentives of incumbent firms to maintain reputation for toughness. Entry deterrence has a public good property. Since maintaining reputation is costly, each incumbent has an incentive to free ride on the entry deterring activities of its counterpart. As a result of these incentives, both incumbents accommodate when they both have a relatively high initial reputation for toughness. This extreme form of underinvestment in entry deterrence becomes less likely as the number of markets with potential entry increases. We also demonstrate that an incumbent's payoff is a decreasing function of its reputation over a large range of parameters. This result stands in sharp contrast to the existing versions of the chain-store game where high reputation for toughness always benefits a weak incumbent. D 2005 Elsevier B.V. All rights reserved. JEL classification: L13; C72

This paper introduces wage bargaining in the framework of Milgrom and Roberts (1982, Econometrica: 50(2), p. 443-459) where the workers' reservation wage is the relevant information parameter critical for entry. We show that entry threat significantly distorts the wage, which in turn adversely affects the firm's ability to signal through price. Consequently, the separating equilibrium (in price) does not always exist. Instead, we get a semi-separating equilibrium. Pooling equilibrium may not also exist. If, however, wage agreements can be made public, signalling occurs with or without distortions in the full information wages. Pooling equilibrium in wage also exists. We also examine whether wage or price is the preferred signalling device, and whether wage agreements should be made public or not.

This paper reconsiders Selten's famous 'chain store paradox' and its solution by Kreps and Wilson, which is based on entrants' uncertainty concerning the incumbent monopolist's predisposition to fight entry. Following Milgrom and Roberts, we interpret the predisposition to fight entry as the result of a rationally chosen commitment. However, commitment is imperfectly observable. Other assumptions are maintained. We show that a rational monopolist never fights entry, even if he may commit himself to an aggressive course of action. Entry occurs in all markets and is never fought. Hence, Selten's chain store paradox comes back in full force.

It is well-known in the IO literature that incumbent firms may want to deter entry by behaving as if they are efficient. In this paper we show that incumbents may sometimes prefer to encourage entry by mimicking the behaviour of a less efficient firm for the following reason. If the incumbent cannot deter potential efficient entrants, he may want to elicit entry by an inefficient firm who would not enter if he knows that the incumbent is efficient. The presence of the additional firm in the market prevents further entry. The incumbent then faces a less efficient competitor in the long run.

We discuss a simple incomplete contractmodel between a buyer and a seller with third party externality. We outline the conditions under which an equilibrium with entry deterrence and non-contractible specific (over) investment occurs. Our result contrasts with standard incomplete contract theory conclusions in three respects: it outlines first, how equilibrium with overinvestment rather than with underinvestment may apply; second, how overinvestment may act as an endogenous enforcement device for incomplete contracts; ...

The optimal location and time of entry are examined in a horizontally differentiated market using a simple duopoly model with sequential entry. Assuming high entry and relocation costs, we find that (1) the late entrant always locates in the periphery (maximum differentiation), (2) the first entrant will choose either a peripheral location or a central location (minimum differentiation) but not an intermediate location, (3) the choice of a central location is optimal when the effectiveness of entry deterrence is enhanced by low transportation costs, high interest rates, high fixed costs and a low market growth rate.

We study how the threat of entry affects financial contracting between an incumbent firm and a bank, in a stochastic and dynamic environment. Contracts are short term and public. We determine the effects of the first period financial contract on the first period outputs in face of the threat of entry. Specifically, it is shown that the distance between first period outputs is increased due to potential entry. This is due to two underlying effects: first, the threat of entry reduces the signal dampening effect and thus the surplus left to the low cost incumbent is reduced. Second, learning is more valuable as it decreases the probability of entry. Indeed, experimentation takes on a strategic form, since the bank must take into account the impact of the possible game on its expected profits. This work integrates the agency problem between a firm and its financial intermediary with the issue of entry-deterrence under uncertainty.

We consider an incumbent who operates in two independent markets and has private information about his production cost. In one of the markets, there is a potential entrant o¤ering a di¤erentiated product. The most reasonable perfect bayesian equilibrium is either the least cost separating equilibrium or the pooling equilibrium where both types of incumbents set the low cost monopoly prices. The equilibrium may involve a downward distortion in both markets pre-entry prices. This distortion is increasing with the discount factor, the degree of product substitutability and the e¢ ciency of the entrant. An implication of our model for international trade policy is that a lower price in the foreign market is neither a necessary nor a su¢ cient condition for the existence of entry deterrence in the foreign market.

This paper studies the entry deterring limit pricing model in a continuous time and in the presence of market uncertainty. Strategic considerations are reacher than in the standard two-period model. Entry deterring limit pricing is only pos- sible within lower and upper bounds of the market size and if the incumbent is stronger than the potential entrant. No limit pricing

We study the relationship between financial contracting and entry deterrence when the potential entrant observes the market price but does not observe the financial contract. This leads to the possibility that the entrant and the lender have different beliefs about the incumbent's costs, due to uncertainty in the demand for the good. We show that as a result, the incumbent produces a different level of output in the first period and the probability of entry increases compared to the case when the entrant observes the financial contract.

We examine the e¤ect of a threat of entry on experimentation about demand by an incumbent monopolist when there is a …xed cost of entry. We also examine the impact of experimentation on the probability of entry into the market. We show that experimentation may itself be used as a tool for entry deterrence and derive conditions under which experimentation reduces the probability of entry. These conditions depend on the entry rule which in turn depends on entry costs. We show that if experimentation does not deter entry, the monopolist incumbent experiments less. We also characterize experimentation and entry in the linear-uniform example and show that entry may reduce experimentation.

We examine an incumbent's trade-off between the improved efficiency that business expansion facilitates and the signaling role that business expansion plays in conveying information to potential entrants about the state of demand. We demonstrate that both separating and pooling equilibria survive the Intuitive Criterion. Essentially, in contrast to models with asymmetric information about unit cost, incumbents' benefits from investing in a signal are not necessarily monotonic in the state of demand. We investigate how the extent of informativeness of the outcome depends on the enhanced efficiency that the incumbent's expansion facilitates and the priors of the entrant.

This paper characterizes equilibrium outcomes of extensive form games with incomplete information in which players can sign renegotiable contracts with third-parties. Our aim is to understand the extent to which third-party contracts can be used as commitment devices when it is impossible to commit not to renegotiate them. We characterize renegotiation-proof contracts and strategies for general extensive form games with incomplete information and apply our results to two-stage games. If contracts are observable, then the second mover obtains her best possible payoff given that she plays a renegotiation-proof strategy and the first mover best responds. If contracts are unobservable, then a "folk theorem" type result holds: Any outcome in which the second mover best responds to the first mover's action on the equilibrium path and the first mover receives at least his "individually rational payoff", can be supported. We also apply our results to games with monotone externalities and to a model of credibility of monetary policy and show that in both cases renegotiation-proofness imposes a very simple restriction.

We consider a two-period framework where a multimarket incumbent firm faces, in one of the markets, a single potential entrant offering a differentiated product. The incumbent has private information about his production cost and may use both pre-entry prices as predatory signals. We find multiple pure strategy perfect bayesian equilibria. Using equilibrium refine- ments, we show that there is always a unique reasonable perfect bayesian equilibrium. Our results show that in some cases this unique equilibrium entails a downward distortion in both low cost incumbent's pre-entry prices. Moreover, we show that this distortion is identical in both markets and increasing with the discount factor, the degree of product substitutability and the efficiency of the entrant.

Considering the number of new product introductions and available product varieties today, the practice of product proliferation is visibly evident in many diverse industries. Given its prevalence in practice, understanding the determinants and implications of firm proliferation strategies clearly has important managerial relevance. Previous theoretical research has identified three primary effects of a proliferation strategy: (1) a broad product line can increase the overall demand faced by the firm, (2) a broad product line can affect supply by increasing costs, and (3) broad product lines can have strategic consequences (e.g., long product lines can deter entry, thereby allowing an incumbent firm to raise prices). However, despite the theoretical interest in this common business practice, there has been very little empirical research on this topic. Moreover, no empirical study has simultaneously considered all three of the possible effects associated with a proliferation strategy. Consequently, in this paper we propose a three-equation simultaneous system that captures both the determinants and market outcomes of a firm's product line decisions. In particular,

This paper aims to analyse the information asymmetry as a source of inefficiencies to the Brazilian Power Industry. This article focuses on the currently adopted prices formation model based on operation costs minimization without price bidding. We show that the use of adverse selection, by means of a defensive conduct in the electricity production policy (i.e., no exposure in the

I consider bundling of two products as a strategy to avoid entry in a differentiated product market. I construct a simple model in which the potential entrant can offer a differentiated product to one of the incumbent's products. I show that the incumbent optimally bundles irrespective of entry. For a given entry decision, the incumbentís gains are small compared to the entrant's loss; its gains are substantial when the bundling induces the potential entrant not to enter the market. In this case bundling blockades entry and reduces welfare.

We analyse the wage choice of a monopoly union against entry threat. The wage carries information about market demand, which is crucial to an uninformed entrant, and in addition affects the entrant's post-entry cost through labour market institutions. The union may wish to deter or accommodate entry depending on whether the entrant will hire from a different source or from the union. Equilibrium wage is distorted downwardly (upwardly) for deterrence (accommodation); but because of wage correlation a low (high) wage can also turn entry profitable (unprofitable). Therefore, separating equilibrium may not always exist, and entry outcomes may be inefficient.

We discuss a simple incomplete contractmodel between a buyer and a seller with third party externality. We outline the conditions un- der which an equilibrium with entry deterrence and non-contractible specific (over)investment occurs. Our result contrasts with standard incomplete contract theory conclusions in three respects: it outlines first, how equilibrium with overinvestment rather than with underin- vestment may apply; second,

In this paper, we analyze the interaction between an incumbent rm's nancial contract with a bank and its product market decisions in the face of the threat of entry, in a dynamic model. The main results of the paper are: there exists a separating equilibrium with no limit pricing the low-cost incumbent r e p a ys more to the bank in the rst period, due to the threat of entry and there are parameter values for which the bank makes more pro ts with the threat of entry than without.

Significant amount of vertical technology transfer occurs between developed and developing country firms, yet the literature on intellectual property rights did not pay much attention to this aspect. We show that whether or not the incumbent and the entrant final goods producers are from the same developed country, patent protection in the developing country raises developed-country welfare if (i) patent protection in the developing country deters entry in the final goods market, (ii) the marginal cost difference between the incumbent and the entrant final goods producers is sufficiently small, and (iii) the marginal cost difference between the incumbent and the entrant developing-country firms is sufficiently high.

We consider an incumbent who operates in two independent markets and has private information about his production cost. In one of the markets, there is a potential entrant o¤ering a di¤erentiated product. The most reasonable perfect bayesian equilibrium is either the least cost separating equilibrium or the pooling equilibrium where both types of incumbents set the low cost monopoly prices. The equilibrium may involve a downward distortion in both markets pre-entry prices. This distortion is increasing with the discount factor, the degree of product substitutability and the e¢ ciency of the entrant. An implication of our model for international trade policy is that a lower price in the foreign market is neither a necessary nor a su¢ cient condition for the existence of entry deterrence in the foreign market.

This paper considers a case of Fragmented Duopoly (Basu and Bell, 1991) where firms have a captive segment each and compete in the remaining (contested) segment in a standard Cournot fashion. We study a two-stage game. In the first period the existing firm chooses the size of the captive segment (incurring some cost, of course) and then both the firms choose quantities to sell in the second stage. Given a small fixed cost (relevant to the contested segment), the second stage game has three possible equilibria (two corner and the interior one). These induce a proliferation of subgame perfect Nash equilibria in the whole game. We use a version of forward induction rationality to refine this set. We find the unique equilibrium, where the existing firm has monopoly over the entire market. Some applications and extensions are suggested.

We examine an incumbent's trade-off between the improved efficiency that business expansion facilitates and the signaling role that business expansion plays in conveying information to potential entrants about the state of demand. We demonstrate that both separating and pooling equilibria survive the Intuitive Criterion. Essentially, in contrast to models with asymmetric information about unit cost, incumbents' benefits from investing in a signal are not necessarily monotonic in the state of demand. We investigate how the extent of in formativeness of the outcome depends on the enhanced efficiency that the incumbent's expansion facilitates and the priors of the entrant. Revised November 2009.

We study the relationship between financial contracting and entry deterrence when the potential entrant observes the market price but does not observe the financial contract. This leads to the possibility that the entrant and the lender have different beliefs about the incumbent's costs, due to uncertainty in the demand for the good. We show that as a result, the incumbent produces a different level of output in the first period and the probability of entry increases compared to the case when the entrant observes the financial contract.

This paper reconsiders Selten's famous 'chain store paradox' and its solution by Kreps and Wilson, which is based on entrants' uncertainty concerning the incumbent monopolist's predisposition to fight entry. Following Milgrom and Roberts, we interpret the predisposition to fight entry as the result of a rationally chosen commitment. However, commitment is imperfectly observable. Other assumptions are maintained. We show that a rational monopolist never fights entry, even if he may commit himself to an aggressive course of action. Entry occurs in all markets and is never fought. Hence, Selten's chain store paradox comes back in full force.

We examine a market on which a monopolistic firm supplies a good. The production of the good causes damage to the environment. Consumers are heterogeneous with respect to their disutility of the environmental damage. An environmental group can enter the market and set up a campaign in order to influence consumers' preferences. We characterize the equilibrium of the resulting entry-deterrence game and investigate its social welfare properties. In equilibrium social welfare is largest if the monopolist deters entry of the EG by selecting a clean-enough production technique. JEL classification: L1, Q2.