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Raising Rivals’ Fixed Costs

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  • Morten Hviid
  • Matthew Olczak

Abstract

This article demonstrates that raising fixed costs can serve as a credible mechanism for a well placed firm to exclude its rivals. We identify a number of credible avenues, such as increased regulation, vexatious litigation and increased prices for essential inputs, through which such a firm can raise fixed costs. We show that for a wide range of oligopoly models this may be a profitable strategy, even if the firm’s own fixed costs are affected as much (or even more) than its rivals and even if it is less efficient. The resulting reduction in the number of firms in the market is detrimental to consumer welfare and hence worthy of scrutiny by competition and regulatory authorities.

Suggested Citation

  • Morten Hviid & Matthew Olczak, 2016. "Raising Rivals’ Fixed Costs," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 23(1), pages 19-36, February.
    • Handle: RePEc:taf:ijecbs:v:23:y:2016:i:1:p:19-36
    DOI: 10.1080/13571516.2015.1055913
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    References listed on IDEAS

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    1. William P. Rogerson, 1984. "A Note on the Incentive for a Monopolist to Increase Fixed Costs as a Barrier to Entry," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 99(2), pages 399-402.
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    Cited by:

    1. Miles Kellerman, 2021. "Market structure and disempowering regulatory intermediaries: Insights from U.S. trade surveillance," Regulation & Governance, John Wiley & Sons, vol. 15(4), pages 1350-1369, October.
    2. E. Bacchiega & P. G. Garella, 2018. "Niche vs. central firms: Technology choice and cost-price dynamics in a differentiated oligopoly," Working Papers wp1126, Dipartimento Scienze Economiche, Universita' di Bologna.
    3. Hanna Skjervheim Bernes & Isabel Marie Flo & Øystein Foros & Hans Jarle Kind, 2019. "Raising rivals’ costs or improving efficiency? An exploratory study of managers’ views on backward integration in the grocery market," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 18(1), pages 65-75, February.

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