A theory of entry dissuasion

Author:

Buccella Domenico1ORCID,Fanti Luciano2

Affiliation:

1. Department of Economics Kozminski University Warsaw Poland

2. Department of Economics and Management University of Pisa Pisa Italy

Abstract

AbstractIn an industry with homogeneous goods, this note compares the standard incumbent's strategic capacity choice versus the incumbent's pre‐emptive payment (profit) transfer (PPT) strategy (i.e., pre‐entry acquisition). It is shown that via the transfer option, the incumbent holds its monopoly position “dissuading” the potential competitor entry for a range of fixed costs larger than under strategic capacity. Moreover, in that range, at least one firm is better off under PPT, while the other is indifferent between PPT and capacity choice. That is, in contestable markets, the incumbent can keep its dominant position in an easier way than standard models predict.

Publisher

Wiley

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