AbstractActions a firm takes in one market may affect its profitability in other markets, beyond any joint economies or diseconomies in production. The reason is that an action in one market, by changing marginal costs in a second market, may change competitors' strategies in that second market. We show how to calculate the strategic consequences in market 2, of a change in conditions in market 1 or of a firm's action in market 1. Qualitatively, the same results hold for both simultaneous markets and sequential markets: whether a more aggressive (i.e., lower price or higher quantity) strategy in the first market provides strategic costs or benefits depends on (a) whether competitors' products are strategic substitutes or strategic complements. The latter distinction is determined by whether more aggressive play by one firm in a market raises or lowers competing firms' marginal profitabilities in that market. We discuss applications to how firms select "portfolios" of businesses in which to compete, to rational retaliation as a barrier to entry, to international trade, and to the learning curve. Both strategic substitutes competition and strategic complements competition are compatible with either quantity competition or price competition. For example, strategic complements competition arises from price competition with linear demand and from quantity competition with constant elasticity demand. The distinction between strategic substitutes and strategic complements is also important in other areas of industrial organization. For example, we show that with strategic complements competition firms will strategically underinvest in fixed costs. This contrasts with earlier studies which, focusing on the total profits of potential entrants rather than the marginal profits of established competitors, invariably emphasized the use of excess capacity.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 674.
Length: 57 pages
Date of creation: Aug 1983
Date of revision:
Publication status: Published in Journal of Political Economy (1980), 93(3): 488-511
Note: CFP 620.
Contact details of provider:
Postal: Yale University, Box 208281, New Haven, CT 06520-8281 USA
Phone: (203) 432-3702
Fax: (203) 432-6167
Web page: http://cowles.econ.yale.edu/
More information through EDIRC
Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Spulber, Daniel F, 1981. "Capacity, Output, and Sequential Entry," American Economic Review, American Economic Association, vol. 71(3), pages 503-14, June.
- Avinash Dixit, 1979.
"A Model of Duopoly Suggesting a Theory of Entry Barriers,"
Bell Journal of Economics,
The RAND Corporation, vol. 10(1), pages 20-32, Spring.
- Dixit, Avinash K., 1978. "A Model of Duopoly Suggesting a Theory of Entry Barriers," The Warwick Economics Research Paper Series (TWERPS) 125, University of Warwick, Department of Economics.
- Jonathan Eaton & Gene M. Grossman, 1986.
"Optimal Trade and Industrial Policy Under Oligopoly,"
NBER Working Papers
1236, National Bureau of Economic Research, Inc.
- Eaton, Jonathan & Grossman, Gene M, 1986. "Optimal Trade and Industrial Policy under Oligopoly," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 383-406, May.
- Schmalensee, Richard, 1983. "Advertising and Entry Deterrence: An Exploratory Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 636-53, August.
- Paul Milgrom & John Roberts, 1998.
"Limit Pricing and Entry Under Incomplete Information: An Equilibrium Analysis,"
Levine's Working Paper Archive
245, David K. Levine.
- Milgrom, Paul & Roberts, John, 1982. "Limit Pricing and Entry under Incomplete Information: An Equilibrium Analysis," Econometrica, Econometric Society, vol. 50(2), pages 443-59, March.
- Kenneth L. Judd, 1983.
"Credible Spatial Preemption,"
577, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Jeremy I. Bulow & John Geanakoplos, 1983. "Strategic Resource Extraction: When Easy Doesn't Do It," Cowles Foundation Discussion Papers 675, Cowles Foundation for Research in Economics, Yale University.
- Barbara J. Spencer & James A. Brander, 1982. "Tariff Protection and Imperfect Competition," Working Papers 517, Queen's University, Department of Economics.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Glena Ames).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.