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Coexistence of Small and Dominant Firms in Bertrand Competition: Judo Economics in the Lab

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  • Daniel Cracau
  • Abdolkarim Sadrieh

Abstract

Judo economics describes an entry strategy for small firms. Using a capacity limitation, they force dominant market incumbents to accommodate. We study the power of judo economics in different market environments. We find experimental evidence supporting the theory in the original setting with a monopolistic, dominant market incumbent. When we introduce a cost advantage for small firms, profits go down. This can be explained by incumbents responding aggressively towards large entrants. For settings with multiple market incumbents, the results are reversed. There, a cost advantage strengthens small firms, and pricing below the incumbents' marginal cost provides the unique entry strategy.

Suggested Citation

  • Daniel Cracau & Abdolkarim Sadrieh, 2016. "Coexistence of Small and Dominant Firms in Bertrand Competition: Judo Economics in the Lab," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 172(4), pages 665-693, December.
    • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(201612)172:4_665:cosadf_2.0.tx_2-t
    DOI: 10.1628/093245616X14616712130561
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    References listed on IDEAS

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    1. Duffy, John & Hopkins, Ed, 2005. "Learning, information, and sorting in market entry games: theory and evidence," Games and Economic Behavior, Elsevier, vol. 51(1), pages 31-62, April.
    2. García Díaz, Antón & Hernán González, Roberto & Kujal, Praveen, 2009. "List pricing and discounting in a Bertrand-Edgeworth duopoly," International Journal of Industrial Organization, Elsevier, vol. 27(6), pages 719-727, November.
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    Cited by:

    1. Daniel Cracau & Benjamin Franz, 2013. "Judo Economics in Markets with Multiple Firms," FEMM Working Papers 130013, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    2. Cracau, Daniel, 2013. "Judo economics in markets with asymmetric firms," Economics Letters, Elsevier, vol. 119(1), pages 35-37.
    3. Klaus Abbink & Lu Dong & Lingbo Huang, 2021. "Arms Races and Conflict: Experimental Evidence," The Economic Journal, Royal Economic Society, vol. 131(637), pages 1883-1904.

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    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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