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Subsidizing the Competition

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  • Aidan Hollis

Abstract

This paper examines puzzling behavior in industries in which one firm is able to obtain a price premium and/or a dominant market share for a product which is identical to that of its rivals. It is shown that when there is learning by doing, economies of scale, network externalities, or reputational effects, the dominant firm's position may be enhanced by the presence of many weak competitors rather than a few strong ones. The dominant firm may therefore subsidize entry by giving away technical information, setting low licensing fees, or creating its own in-house competition.

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File URL: http://www.economics.utoronto.ca/public/workingPapers/UT-ECIPA-ECPAP-96-02.ps
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File URL: http://www.economics.utoronto.ca/public/workingPapers/UT-ECIPA-ECPAP-96-02.pdf
File Function: MainText
Download Restriction: no

Bibliographic Info

Paper provided by University of Toronto, Department of Economics in its series Working Papers with number ecpap-96-02.

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Length: 23 pages
Date of creation: 02 Jan 1996
Date of revision:
Handle: RePEc:tor:tecipa:ecpap-96-02

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  1. Richard Schmalensee, 1978. "Entry Deterrence in the Ready-to-Eat Breakfast Cereal Industry," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 305-327, Autumn.
  2. Joseph Farrell and Nancy T. Gallini., 1986. "Second-Sourcing as a Commitment: Monopoly Incentives to Attract Competition," Economics Working Papers 8618, University of California at Berkeley.
  3. Fudenberg, Drew & Tirole, Jean, 1984. "The Fat-Cat Effect, the Puppy-Dog Ploy, and the Lean and Hungry Look," American Economic Review, American Economic Association, vol. 74(2), pages 361-66, May.
  4. Mukesh Eswaran, 1994. "Licensees as Entry Barriers," Canadian Journal of Economics, Canadian Economics Association, vol. 27(3), pages 673-88, August.
  5. Nicholas Economides, 1997. "Network Externalities, Complementarities, and Invitations to Enter," Industrial Organization 9701004, EconWPA.
  6. Nancy T. Gallini & Ralph A. Winter, 1985. "Licensing in the Theory of Innovation," RAND Journal of Economics, The RAND Corporation, vol. 16(2), pages 237-252, Summer.
  7. Gallini, Nancy T, 1984. "Deterrence by Market Sharing: A Strategic Incentive for Licensing," American Economic Review, American Economic Association, vol. 74(5), pages 931-41, December.
  8. Salop, Steven C & Scheffman, David T, 1983. "Raising Rivals' Costs," American Economic Review, American Economic Association, vol. 73(2), pages 267-71, May.
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