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Free Riding in Noncooperative Entry Deterrence with Differentiated Products

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Author Info

  • Dan Kovenock

    ()
    (Purdue University)

  • Suddhasatwa Roy

    ()
    (Department of Economics, California State University)

Abstract

We examine free riding and underinvestment in noncooperative entry deterrence in the Gilbert and Vives (1986) model with differentiated products. Our analysis proves that for products that are differentiated enough, when both entry allowing and entry deterring equilibria coexist, the symmetric entry deterring equilibrium may Pareto dominate the entry equilibrium. Hence, “coordination failure” underinvestment in entry prevention can occur. However, as claimed, the overinvestment result of Gilbert and Vives remains robust to moderate amounts of product differentiation. We also show that coordination failure underinvestment arises in a wide variety of entry deterrence models and does not rely on assumptions regarding strategic substitutability or complementarity of precommitments.

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Bibliographic Info

Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 72 (2005)
Issue (Month): 1 (July)
Pages: 119–137

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Handle: RePEc:sej:ancoec:v:72:1:y:2005:p:119-137

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Web page: http://www.southerneconomic.org/
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Cited by:
  1. Felix Höffler, 2008. "On the consistent use of linear demand systems if not all varieties are available," Economics Bulletin, AccessEcon, vol. 4(14), pages 1-5.
  2. Appelbaum, Elie & Weber, Shlomo, 1992. "A note on the free rider problem in oligopoly," Economics Letters, Elsevier, vol. 40(4), pages 473-480, December.
  3. repec:ebl:ecbull:v:4:y:2008:i:14:p:1-5 is not listed on IDEAS

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