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Entry, Product Line Expansion, And Predation

Author

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  • Vincenzo Denicolò
  • Michele Polo
  • Piercarlo Zanchettin

Abstract

In the Tourist-Caronte case in Italy, the incumbent, Tourist-Caronte, reacted to entry by entrant Diano by starting to supply a “damaged good” in the sense theorized by Deneckere and McAfee in 1996. We argue that in principle this strategy can be predatory, but it can also be an innocent response to entry. Specifically, the strategy of damaging the good leads to fiercer competition in the low segment of the market, which reduces the rents that the incumbent earns in the high segment, but may allow the incumbent to steal some of the entrant's rents. If this business stealing effect in the low segment of the market is sufficiently strong, the incumbent may find it profitable to expand its product line after entry, even if it does not have any predatory intent. We discuss the welfare effects of this strategy, and we contrast it with predation.

Suggested Citation

  • Vincenzo Denicolò & Michele Polo & Piercarlo Zanchettin, 2007. "Entry, Product Line Expansion, And Predation," Journal of Competition Law and Economics, Oxford University Press, vol. 3(4), pages 609-624.
    • Handle: RePEc:oup:jcomle:v:3:y:2007:i:4:p:609-624.
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    File URL: http://hdl.handle.net/10.1093/joclec/nhm013
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    References listed on IDEAS

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    1. Richard Schmalensee, 1978. "Entry Deterrence in the Ready-to-Eat Breakfast Cereal Industry," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 305-327, Autumn.
    2. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
    3. Raymond J. Deneckere & R. Preston McAfee, 1996. "Damaged Goods," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(2), pages 149-174, June.
    4. Kenneth L. Judd, 1985. "Credible Spatial Preemption," RAND Journal of Economics, The RAND Corporation, vol. 16(2), pages 153-166, Summer.
    5. repec:bla:econom:v:46:y:1979:i:182:p:149-58 is not listed on IDEAS
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    Cited by:

    1. Verboven, Frank & Bourreau, Marc & Sun, Yutec, 2018. "Market Entry, Fighting Brands and Tacit Collusion: The Case of the French Mobile Telecommunications Market," CEPR Discussion Papers 12866, C.E.P.R. Discussion Papers.

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