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Exclusionary Practices and Entry Under Asymmetric Information

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  • Martin Peitz

    (Universidad de Alicante)

Abstract

A firm entering a market often has to solve the problem that consumers do not know the quality of its product. The present paper, studying entry by a firm facing an incumbent rival, shows that the latter's reaction to entry can work as a substitute for the entrant's revelation costs. As a particular case, when firms use retailers to sell their goods, the incumbent can decide whether or not to apply an exclusive dealing clause. Since the incumbent's strategy entails enforcement of the clause only against a low quality entrant, shared retailing reveals to consumers that the entrant's quality is high, and the asymmetric information problem is solved. If the possibility of exclusion is prohibited, the equilibria with entry by the high quality are destroyed. More generally, the discretionary use of exclusionary practices, or of comparative advertising, can solve the asymmetric information problem for the entrant, thereby facilitating entry.

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Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1197.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:1197

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  1. Steve Tadelis, 1997. "What's in a Name? Reputation as a Tradeable Asset," Working Papers 97033, Stanford University, Department of Economics.
  2. KOHLBERG, Elon & MERTENS, Jean-François, . "On the strategic stability of equilibria," CORE Discussion Papers RP -716, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. B. Douglas Bernheim & Michael D. Whinston, 1998. "Exclusive Dealing," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 64-103, February.
  4. Steven A Matthews & Doron Fertig, 1990. "Advertising Signals of Product Quality," Discussion Papers 881, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. Comanor, William S & Frech, H E, III, 1985. "The Competitive Effects of Vertical Agreements?," American Economic Review, American Economic Association, vol. 75(3), pages 539-46, June.
  6. Biglaiser, Gary & Friedman, James W., 1994. "Middlemen as guarantors of quality," International Journal of Industrial Organization, Elsevier, vol. 12(4), pages 509-531, December.
  7. Joseph Farrell, 1985. "Moral Hazard as an Entry Barrier," Working papers 387, Massachusetts Institute of Technology (MIT), Department of Economics.
  8. Pil Choi, J., 1997. "Brand Extension as Informational Leverage," ISER Discussion Paper 0451, Institute of Social and Economic Research, Osaka University.
  9. Wujin Chu & Woosik Chu, 1994. "Signaling Quality by Selling Through a Reputable Retailer: An Example of Renting the Reputation of Another Agent," Marketing Science, INFORMS, vol. 13(2), pages 177-189.
  10. Martin Peitz & Paolo G. Garella, 1999. "- Intermediation Can Replace Certification," Working Papers. Serie AD 1999-04, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  11. Rey, Patrick & Tirole, Jean, 2007. "A Primer on Foreclosure," Handbook of Industrial Organization, Elsevier.
  12. Marvel, Howard P, 1982. "Exclusive Dealing," Journal of Law and Economics, University of Chicago Press, vol. 25(1), pages 1-25, April.
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