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A theory of entry dissuasion

Author

Listed:
  • Domenico Buccella
  • Luciano Fanti

Abstract

In an industry with homogeneous goods, this note compares the standard incumbent's strategic capacity choice vs the incumbent's pre-emptive payment (profit) transfer (PPT) strategy (i.e., preentry acquisition). It is shown that, via the transfer option, the incumbent holds its monopoly position "dissuading" the potential competitor entry for a range of fixed costs larger than under strategic capacity. Moreover, in that range, the monopolist via transfer ensures higher payoffs both for itself and the potential competitor. That is, in contestable markets, the incumbent can keep its dominant position in an easier way than standard models predict.

Suggested Citation

  • Domenico Buccella & Luciano Fanti, 2020. "A theory of entry dissuasion," Discussion Papers 2020/265, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
    • Handle: RePEc:pie:dsedps:2020/265
    Note: ISSN 2039-1854
    as

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    File URL: https://www.ec.unipi.it/documents/Ricerca/papers/2020-265.pdf
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    References listed on IDEAS

    as
    1. Dixit, Avinash, 1980. "The Role of Investment in Entry-Deterrence," Economic Journal, Royal Economic Society, vol. 90(357), pages 95-106, March.
    2. A. Michael Spence, 1977. "Entry, Capacity, Investment and Oligopolistic Pricing," Bell Journal of Economics, The RAND Corporation, vol. 8(2), pages 534-544, Autumn.
    3. Preston R. Fee & Hugo M. Mialon & Michael A. Williams, 2004. "What Is a Barrier to Entry?," American Economic Review, American Economic Association, vol. 94(2), pages 461-465, May.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Rabbani, Maysam, 2023. "Mergers with future rivals can boost prices, bar entry, and intensify market concentration," International Journal of Industrial Organization, Elsevier, vol. 88(C).

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    More about this item

    Keywords

    Entry deterrence; Monopoly; Duopoly;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm

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