Potential Competition in the Presence of Sunk Entry Costs: An Experiment
AbstractI study the effect of sunk entry-costs on potential competition in a multi-market framework, where potential entrants have different home market profits. Although sunk-entry-costs are supposed to increase entry barriers, my experimental results suggest that firms view entry costs differently depending on their home market profits. I find that subjects are reluctant to enter, and compete in another market if they are already earning monopoly rents. Subjects instead, collude tacitly and earn monopoly rents in home markets, thereby weakening the effect of potential competition. In contrast, subjects who earn small secure returns in their home markets aggressively enter the contestable market whenever there are scopes for earning net profits. The threat of entry and the effects of potential competition are strong in the latter situation, forcing the monopoly incumbents to lower prices to limit-pricing levels.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 21945.
Date of creation: 2009
Date of revision:
Publication status: Published in New Zealand Economics Papers 2.43(2009): pp. 203-225
potential competition; contestable markets; sunk cost; limit-pricing; hit-and-run entry; collusion; experiment;
Other versions of this item:
- Utteeyo Dasgupta, 2009. "Potential competition in the presence of sunk entry costs: an experiment," New Zealand Economic Papers, Taylor & Francis Journals, vol. 43(2), pages 203-225.
- C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
- D4 - Microeconomics - - Market Structure and Pricing
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
- L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
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