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Balance of Power

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  • Boone, Jan

Abstract

This Paper argues that the efficiency distribution of players in a game determines how aggressively these players interact. We formalize the idea of balance of power: players fight very inefficient players but play softly versus equally (or more) efficient players. This theory of conduct predicts that entry by new firms leads to a less aggressive outcome if it creates a balance of power. A balance of power is created if more players get technologies that are close to the most efficient technology. Using a related argument, we show that an increase in entry costs can lead to more aggressive outcomes.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4733.

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Date of creation: Nov 2004
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Handle: RePEc:cpr:ceprdp:4733

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Keywords: contestable market; folk theorem; pricing games; refinement of predicted outcomes; supergames;

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References

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  1. Kirman, Alan & Schueller, Nathalie, 1990. "Price Leadership and Discrimination in the European Car Market," Journal of Industrial Economics, Wiley Blackwell, vol. 39(1), pages 69-91, September.
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Cited by:
  1. Zigic, Kresimir & Maçi, Ilir, 2011. "Competition policy and market leaders," Economic Modelling, Elsevier, vol. 28(3), pages 1042-1049, May.

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