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Aggressive Leaders

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  • Federico Etro

    (Catholic University of Milan)

Abstract

I characterize the incentives to undertake strategic investments in markets with Nash competition and endogenous entry. Contrary to the case with an exogenous number of firms, when the investment increases marginal profitability, only a "top dog" strategy is optimal. For instance, under both quantity and price competition, a market leader overinvests in cost reductions and overproduces complement products. The purpose of the strategic investment is to allow the firm to be more aggressive in the market and to reduce its price below those of other firms. Contrary to the post-Chicago approach, this shows that aggressive pricing strategies are not necessarily associated with exclusionary purposes.

Suggested Citation

  • Federico Etro, 2006. "Aggressive Leaders," RAND Journal of Economics, The RAND Corporation, vol. 37(1), pages 146-154, Spring.
    • Handle: RePEc:rje:randje:v:37:y:2006:1:p:146-154
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    Cited by:

    1. 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.
    2. Etro, Federico, 2011. "Endogenous market structures and contract theory: Delegation, principal-agent contracts, screening, franchising and tying," European Economic Review, Elsevier, vol. 55(4), pages 463-479, May.
    3. Federico Etro, 2010. "Endogenous Market Structures and Contract Theory," Working Papers 181, University of Milano-Bicocca, Department of Economics, revised Mar 2010.
    4. Federico Etro & Andrea Colciago, 2010. "Endogenous Market Structures and the Business Cycle," Economic Journal, Royal Economic Society, vol. 120(549), pages 1201-1233, December.
    5. Jan Boone & Delia Ionascu & Kresimir Zigic, 2006. "Trade Policy, Market Leaders and Endogenous Competition Intensity," CERGE-EI Working Papers wp311, The Center for Economic Research and Graduate Education - Economics Institute, Prague.

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