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Dynamic Price Competition, Briefly Sunk Costs, and Entry Deterrence

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  • Sally M. Davies

Abstract

This article examines how the threat of entry constrains pricing behavior in a natural monopoly with briefly sunk costs. In the model of dynamic price competition explored here, costs are too briefly sunk to confer any strategic advantage to incumbency. Despite the lack of advantage to incumbency, the threat of entry exerts little discipline on prices. In the presence of a slight cost asymmetry, monopoly for the lower-cost firm is the unique equilibrium, regardless of which firm is initially the incumbent.

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  • Sally M. Davies, 1991. "Dynamic Price Competition, Briefly Sunk Costs, and Entry Deterrence," RAND Journal of Economics, The RAND Corporation, vol. 22(4), pages 519-530, Winter.
    • Handle: RePEc:rje:randje:v:22:y:1991:i:winter:p:519-530
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    Cited by:

    1. Herings, P. Jean-Jacques & Peeters, Ronald & Schinkel, Maarten Pieter, 2005. "Intertemporal market division:: A case of alternating monopoly," European Economic Review, Elsevier, vol. 49(5), pages 1207-1223, July.
    2. Michel Dietsch, 1993. "Localisation et concurrence dans la banque," Revue Économique, Programme National Persée, vol. 44(4), pages 779-790.
    3. T.W. Ross, 2004. "Sunk Costs and the Entry Decision," Journal of Industry, Competition and Trade, Springer, vol. 4(2), pages 79-93, June.

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