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A Dynamic Model of Bertrand Competition with Entry

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  • Elmar Wolfstetter

    (HUB)

  • Walter Elberfeld

    (University Koeln)

Abstract

This paper analyzes a simple, repeated game of simultaneous entry and pricing. We report a surprising property of the symmetric equilibrium solution: If the number of potential competitors is increased above two, the market breaks down with higher probability, and the competitive outcome becomes less likely. More potential competition lowers welfare - another Bertrand paradox. The model can also be applied to auctions to explore whether a revenue maximizing auctioneer should restrict the number of bidders if bidder participation is costly.

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Bibliographic Info

Paper provided by EconWPA in its series Microeconomics with number 9701003.

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Date of creation: 24 Jan 1997
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Handle: RePEc:wpa:wuwpmi:9701003

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  1. Joseph Farrell, 1987. "Cheap Talk, Coordination, and Entry," RAND Journal of Economics, The RAND Corporation, vol. 18(1), pages 34-39, Spring.
  2. Elmar WOLFSTETTER, 1994. "Auctions: An Introduction," SFB 373 Discussion Papers 1994,13, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  3. Edward L. Millner & Michael D. Pratt & Robert J. Reilly, 1990. "Contestability in Real-Time Experimental Flow Markets," RAND Journal of Economics, The RAND Corporation, vol. 21(4), pages 584-599, Winter.
  4. Roger Sherman & Thomas D. Willett, 1967. "Potential Entrants Discourage Entry," Journal of Political Economy, University of Chicago Press, vol. 75, pages 400.
  5. McAfee, R. Preston & McMillan, John, 1987. "Auctions with a stochastic number of bidders," Journal of Economic Theory, Elsevier, vol. 43(1), pages 1-19, October.
  6. Dasgupta, P. & Stiglitz, J. E., 1988. "Potential competition, actual competition, and economic welfare," European Economic Review, Elsevier, vol. 32(2-3), pages 569-577, March.
  7. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
  8. Sharkey, William W. & Sibley, David S., 1993. "A Bertrand model of pricing and entry," Economics Letters, Elsevier, vol. 41(2), pages 199-206.
  9. Posner, Richard A, 1975. "The Social Costs of Monopoly and Regulation," Journal of Political Economy, University of Chicago Press, vol. 83(4), pages 807-27, August.
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Citations

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Cited by:
  1. Eric Rasmusen, 1996. "Bertrand Competition Under Uncertainty," Industrial Organization 9607002, EconWPA.
  2. Bertomeu, Jeremy, 2009. "Endogenous shakeouts," International Journal of Industrial Organization, Elsevier, vol. 27(3), pages 435-440, May.
  3. Konrad, Kai A. & Kovenock, Dan, 2012. "The lifeboat problem," Munich Reprints in Economics 13962, University of Munich, Department of Economics.
  4. Kaplan, Todd & Sela, Aner, 2003. "Auctions with Private Entry Costs," CEPR Discussion Papers 4080, C.E.P.R. Discussion Papers.
  5. Bedri Kamil Onur Tas & Rasim Ozcan & Ilke Onur, 2008. "Public Procurement Auctions and Competition in Turkey," Working Papers 0814, TOBB University of Economics and Technology, Department of Economics.
  6. Fan, Cuihong & Wolfstetter, Elmar G., 2006. "Procurement with Costly Bidding, Optimal Shortlisting, and Rebates," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 166, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  7. Toolsema, Linda A., 2003. "Having more potential raiders weakens the takeover threat," Research Report 03F16, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
  8. Toolsema, Linda A., 2007. "Having more potential raiders weakens the takeover threat," Journal of Economic Behavior & Organization, Elsevier, vol. 62(4), pages 670-685, April.
  9. Stähler, Frank, 1996. "The market entry paradox," Kiel Working Papers 777, Kiel Institute for the World Economy.
  10. Israel J. Hernández & Elena Huergo Orejas, 2004. "Entrada y Competencia en los Servicios de Telecomunicaciones," Documentos de Trabajo del ICAE 0404, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
  11. Thomas, Charles J., 2002. "The effect of asymmetric entry costs on Bertrand competition," International Journal of Industrial Organization, Elsevier, vol. 20(5), pages 589-609, May.
  12. Kofi Nti, 2000. "Potential competition and coordination in a market-entry game," Journal of Economics, Springer, vol. 71(2), pages 149-165, June.
  13. Vicki Knoblauch, 2002. "A Comparison of Two-Market Bertrand Duopoly and Two-Market Cournot Duopoly," Working papers 2002-14, University of Connecticut, Department of Economics.

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