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Judo Economics: Capacity Limitation and Coupon Competition

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  • Judith R. Gelman
  • Steven C. Salop
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    Abstract

    This article analyzes the effect of credible capacity limitation on the interaction between an incumbent and an entrant. The prospect of price competition deters entry by a less efficient firm with unlimited capacity. If, however, the entrant practices "judo economics" and limits its capacity sufficiently, it is in the incumbent's interest to accommodate entry. The entrant can increase its profits by selling rights (coupons) to its scarce discount output. If the entrant is less efficient, the incumbent will choose to serve coupon holders at the discount price. When this occurs, the entrant sells coupons but no output, and industry production is rationalized.

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    Bibliographic Info

    Article provided by The RAND Corporation in its journal Bell Journal of Economics.

    Volume (Year): 14 (1983)
    Issue (Month): 2 (Autumn)
    Pages: 315-325

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    Handle: RePEc:rje:bellje:v:14:y:1983:i:autumn:p:315-325

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    Web page: http://www.rje.org

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Wit of blauw?
      by Marco in eco.nomie.nl on 2008-02-18 09:17:13
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    Cited by:
    1. Norman, George & Thisse, Jacques-Francois, 1999. "Technology Choice and Market Structure: Strategic Aspects of Flexible Manufacturing," Journal of Industrial Economics, Wiley Blackwell, vol. 47(3), pages 345-72, September.
    2. Kaz Miyagiwa & Yuka Ohno, 2000. "Top Dogs, Puppy Dogs, and Tax Holidays," Econometric Society World Congress 2000 Contributed Papers 0678, Econometric Society.
    3. Daniel Cracau & Benjamin Franz, 2013. "Judo Economics in Markets with Multiple Firms," FEMM Working Papers 130013, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    4. Cracau, Daniel, 2013. "Judo economics in markets with asymmetric firms," Economics Letters, Elsevier, vol. 119(1), pages 35-37.
    5. Joseph M. Ostroy & Louis Makowski, 2001. "Perfect Competition and the Creativity of the Market," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 479-535, June.
    6. He, Qingxin & Lee, Jonathan M., 2014. "Additional market incentives for abatement: An analysis of flue-gas desulfurization by-products," Resource and Energy Economics, Elsevier, vol. 36(2), pages 370-393.
    7. Ciliberto, Federico & Zhang, Zhou, 2014. "Multiple Equilibria and Deterrence in Airline Markets," MPRA Paper 53232, University Library of Munich, Germany.
    8. Mian Dai & Xun Tang, 2013. "Regulation and Capacity Competition in Health Care: Evidence from Dialysis Markets," PIER Working Paper Archive 13-057, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    9. Raymond Deneckere & Dan Kovenock, 1994. "Capacity-Constrained Price Competition when Unit Costs Differ," Industrial Organization 9411001, EconWPA, revised 15 Nov 1994.
    10. Mikhael Shor, 2008. "An experiment on strategic capacity reduction," Working papers 2012-22, University of Connecticut, Department of Economics.
    11. Matthew Spiegel & Heather Tookes, 2008. "Dynamic Competition, Innovation and Strategic Financing," Yale School of Management Working Papers amz2500, Yale School of Management.

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