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A dynamic model of Bertrand competition with entry

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  • Elberfeld, Walter
  • Wolfstetter, Elmar

Abstract

This paper analyzes a simple, repeated game of simultaneous entry and pricing. We report a surprising property of the symmetric equilibrium solution: If the number of potential competitors is increased above two, the market breaks down with higher probability, and the competitive outcome becomes less likely. More potential competition lowers welfare - another Bertrand paradox. The model can also be applied to auctions to explore whether a revenue maximizing auctioneer should restrict the number of bidders if bidder participation is costly.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 17 (1999)
Issue (Month): 4 (May)
Pages: 513-525

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Handle: RePEc:eee:indorg:v:17:y:1999:i:4:p:513-525

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Web page: http://www.elsevier.com/locate/inca/505551

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References

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  1. Joseph Farrell, 1987. "Cheap Talk, Coordination, and Entry," RAND Journal of Economics, The RAND Corporation, vol. 18(1), pages 34-39, Spring.
  2. Edward L. Millner & Michael D. Pratt & Robert J. Reilly, 1990. "Contestability in Real-Time Experimental Flow Markets," RAND Journal of Economics, The RAND Corporation, vol. 21(4), pages 584-599, Winter.
  3. Roger Sherman & Thomas D. Willett, 1967. "Potential Entrants Discourage Entry," Journal of Political Economy, University of Chicago Press, vol. 75, pages 400.
  4. Wolfstetter, Elmar, 1996. " Auctions: An Introduction," Journal of Economic Surveys, Wiley Blackwell, vol. 10(4), pages 367-420, December.
  5. Sharkey, William W. & Sibley, David S., 1993. "A Bertrand model of pricing and entry," Economics Letters, Elsevier, vol. 41(2), pages 199-206.
  6. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
  7. McAfee, R. Preston & McMillan, John, 1987. "Auctions with a stochastic number of bidders," Journal of Economic Theory, Elsevier, vol. 43(1), pages 1-19, October.
  8. Dasgupta, P. & Stiglitz, J. E., 1988. "Potential competition, actual competition, and economic welfare," European Economic Review, Elsevier, vol. 32(2-3), pages 569-577, March.
  9. Posner, Richard A, 1975. "The Social Costs of Monopoly and Regulation," Journal of Political Economy, University of Chicago Press, vol. 83(4), pages 807-27, August.
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Citations

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Cited by:
  1. Konrad, Kai A. & Kovenock, Dan, 2011. "The lifeboat problem," Discussion Papers, Research Professorship & Project "The Future of Fiscal Federalism" SP II 2011-106, Social Science Research Center Berlin (WZB).
  2. Eric Rasmusen, 1996. "Bertrand Competition Under Uncertainty," Industrial Organization 9607002, EconWPA.
  3. Stähler, Frank, 1996. "The market entry paradox," Kiel Working Papers 777, Kiel Institute for the World Economy.
  4. Bertomeu, Jeremy, 2009. "Endogenous shakeouts," International Journal of Industrial Organization, Elsevier, vol. 27(3), pages 435-440, May.
  5. Toolsema, Linda A., 2007. "Having more potential raiders weakens the takeover threat," Journal of Economic Behavior & Organization, Elsevier, vol. 62(4), pages 670-685, April.
  6. Kaplan, Todd & Sela, Aner, 2003. "Auctions with Private Entry Costs," CEPR Discussion Papers 4080, C.E.P.R. Discussion Papers.
  7. Vicki Knoblauch, 2002. "A Comparison of Two-Market Bertrand Duopoly and Two-Market Cournot Duopoly," Working papers 2002-14, University of Connecticut, Department of Economics.
  8. Thomas, Charles J., 2002. "The effect of asymmetric entry costs on Bertrand competition," International Journal of Industrial Organization, Elsevier, vol. 20(5), pages 589-609, May.
  9. İlke Onur & Rasim Özcan & Bedri Taş, 2012. "Public Procurement Auctions and Competition in Turkey," Review of Industrial Organization, Springer, vol. 40(3), pages 207-223, May.
  10. Fan, Cuihong & Wolfstetter, Elmar G., 2006. "Procurement with Costly Bidding, Optimal Shortlisting, and Rebates," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 166, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  11. Israel J. Muñoz & Elena Huergo, 2005. "Entrada y competencia en los servicios de telecomunicaciones," Industrial Organization 0504002, EconWPA.
  12. Toolsema, Linda A., 2003. "Having more potential raiders weakens the takeover threat," Research Report 03F16, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
  13. Kofi Nti, 2000. "Potential competition and coordination in a market-entry game," Journal of Economics, Springer, vol. 71(2), pages 149-165, June.

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