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Contestable Markets under Uncertainty

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Author Info

  • Elie Appelbaum
  • Chin Lim

Abstract

In this article we present a model of a market which is ex post contestable. We show that in a market characterized by uncertainty a firm will face a tradeoff between efficiency and flexibility and generally will make some precommitments to take advantage of ex ante technologies. We show that in the face of potential entry the incumbent will increase his precommitments and in so doing will affect the probability of entry. The degree of market contestability is therefore endogenously determined by the choice of precommitments. The extent to which precommitments will be used to affect entry probabilities is shown to depend on the efficiency of ex ante production, adjustment costs, and the degree of uncertainty. In particular, we show that the market becomes "more contestable" as the relative efficiency of ex post production increases and as market conditions become more uncertain.

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Bibliographic Info

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

Volume (Year): 16 (1985)
Issue (Month): 1 (Spring)
Pages: 28-40

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Handle: RePEc:rje:randje:v:16:y:1985:i:spring:p:28-40

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Cited by:
  1. Ghosal, Vivek, 2007. "Small is Beautiful but Size Matters: The Asymmetric Impact of Uncertainty and Sunk Costs on Small and Large Businesses," MPRA Paper 5461, University Library of Munich, Germany.
  2. Vivek Ghosal, 2003. "Impact of Uncertainty and Sunk Costs on Firm Survival and Industry Dynamics," CIG Working Papers SP II 2003-12, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
  3. Vivek Ghosal, 2004. "Endemic Volatility Of Firms And Establishments: Are Real Options Effects Important?," Royal Economic Society Annual Conference 2004 4, Royal Economic Society.
  4. Barla, Philippe & Constantatos, Christos, 2005. "Strategic interactions and airline network morphology under demand uncertainty," European Economic Review, Elsevier, vol. 49(3), pages 703-716, April.
  5. Christodoulos Stefanadis, 2003. "Sunk Costs, Contestability, and the Latent Contract Market," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 12(1), pages 119-138, 03.
  6. Ashiya, Masahiro, 2000. "Weak entrants are welcome," International Journal of Industrial Organization, Elsevier, vol. 18(6), pages 975-984, August.
  7. Francisco Ruiz-Aliseda, 2003. "Strategic Commitment Versus Flexibility in a Duopoly with Entry and Exit," Discussion Papers 1379, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. Kevin Lang & William T. Dickens, 1987. "Neoclassical and Sociological Perspectives on Segmented Labor Markets," NBER Working Papers 2127, National Bureau of Economic Research, Inc.
  9. Elie Appelbaum, 2001. "Product Differentiation under Uncertainty," Working Papers 2001_4, York University, Department of Economics.
  10. Vivek Ghosal, 2003. "Firm and Establishment Volatility: The Role of Sunk Costs, Profit Uncertainty and Technological Change," CESifo Working Paper Series 980, CESifo Group Munich.
  11. Gilbert, Stephen M. & Cvsa, Viswanath, 2003. "Strategic commitment to price to stimulate downstream innovation in a supply chain," European Journal of Operational Research, Elsevier, vol. 150(3), pages 617-639, November.
  12. Cairns, Robert D., 1996. "Uncertain contestability," Journal of Economic Behavior & Organization, Elsevier, vol. 30(1), pages 125-131, July.
  13. T.W. Ross, 2004. "Sunk Costs and the Entry Decision," Journal of Industry, Competition and Trade, Springer, vol. 4(2), pages 79-93, 06.

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