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Capacity Competition in Differentiated Oligopolies: Entry Deterrence with Alternative Objective Functions

Author

Listed:
  • Ristić Bojan

    (PhD, Assistant Professor, Faculty of Economics, University of Belgrade)

  • Trifunović Dejan

    (PhD, Full Professor, Faculty of Economics, University of Belgrade)

  • Herceg Tomislav

    (PhD, Assistant Professor, Faculty of Economics and Business, University of Zagreb; Address: Trg J. F. Kennedyja 6, 10000 Zagreb)

Abstract

This paper aims to identify the possible implications of quantity competition in markets with differentiated products on entry deterrence. If capacity commitments characterise this industry, quantities can be expected as the choice variable of rational players, even in the presence of product differentiation. Different equilibria of a static game occur depending on the degree of asymmetry of players, incumbent and entrant, which will crucially affect the shape of their best response functions. Asymmetry can stem from players’ advantage in demand and costs, their different objective functions, or the first-mover advantage. We will analyse entry where incumbent maximises the weighted average of profit and revenue while entrant is maximising profit. The reduction of asymmetry may intensify competition in the industry and, consequently, reduce entry barriers. Our findings provide an insight that could be used for practical recommendations for conducting competition policy and other sector-specific regulations, where the introduction and higher intensity of competition are desirable.

Suggested Citation

  • Ristić Bojan & Trifunović Dejan & Herceg Tomislav, 2021. "Capacity Competition in Differentiated Oligopolies: Entry Deterrence with Alternative Objective Functions," South East European Journal of Economics and Business, Sciendo, vol. 16(1), pages 84-92, June.
  • Handle: RePEc:vrs:seejeb:v:16:y:2021:i:1:p:84-92:n:1
    DOI: 10.2478/jeb-2021-0007
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    References listed on IDEAS

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    More about this item

    Keywords

    differentiated oligopoly; capacities; quantity competition; asymmetry of players; incumbent; entrant;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • 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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