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Free Riding in Noncooperative Entry Deterrence with Differentiated Products

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  • 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. Persson, Lars, 1999. "Predation and Mergers: Is Merger Law Counterproductive?," Working Paper Series 516, Research Institute of Industrial Economics.
  2. 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.
  3. Dermot Nolan, 1998. "Predatory Pricing in an Oligopolistic Framework," Royal Holloway, University of London: Discussion Papers in Economics 98/4, Department of Economics, Royal Holloway University of London, revised Feb 1998.
  4. Appelbaum, Elie & Weber, Shlomo, 1992. "A note on the free rider problem in oligopoly," Economics Letters, Elsevier, vol. 40(4), pages 473-480, December.

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