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Incentives to Grow: Multimarket Firms and Predation

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  • Rainer Nitsche
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    Abstract

    Network industries with low sunk costs have been popular examples for the theory of contestable markets and spatial competition models. We argue that, due to the multimarket nature of operations, theories of predation are more relevant to explain strategic behaviour. Building on well established reputation models our contribution is threefold. First, we use a more realistic sequencing of the game and strengthen the entry deterrence result. Second, we show that rational multimarket firms may use (the threat of) predatory entry to expand. Third, we allow strategic interaction of two multimarket firms and find that multimarket firms do not "attack'' each other. ZUSAMMENFASSUNG - (Expansionsanreize: Multimarktunternehmen und Verdrängungsstrategien) Netzwerkindustrien mit geringen versunkenen Kosten dienten häufig als Anwendungsfelder für die Theorie der bestreitbaren Märkte und für Modelle des räumlichen Wettbewerbs. In der vorliegenden Arbeit wird argumentiert, daß aufgrund der Multimarktnatur dieser Branchen Theorien des Verdrängungsverhaltens eine relevantere Erklärung des strategischen Verhaltens liefern. Auf der Basis der etablierten Reputationsmodelle werden drei Neuerungen entwickelt. Erstens wird eine Spielsequenz eingeführt, die nicht nur realistischer ist als die herkömmliche Modellierung, sondern auch zu einer plausibleren Prognose führt: Verhinderung von Markteintritt in sämtlichen Märkten. Zweitens wird gezeigt, daß rationale Multimarktunternehmen die Drohung eines Markteintritts mit anschließender Verdrängung des alteingesessenen "Mittelständlers" (Einmarktunternehmens) im Rahmen einer Expansionsstrategie glaubhaft nutzen können. Schließlich wird, drittens, die strategische Interaktion von zwei Multimarktunternehmen untersucht. Es zeigt sich, daß sie auf gegenseitigen "Angriff" verzichten und nicht in einen Markt des jeweils anderen Multimarkt-Wettbewerbers eindringen.

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    Paper provided by Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG) in its series CIG Working Papers with number FS IV 00-19.

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    Length: 48 pages
    Date of creation: Dec 2000
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    Handle: RePEc:wzb:wzebiv:fsiv00-19

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    1. Robert Evans & Jonathan P. Thomas, 1997. "Reputation and Experimentation in Repeated Games with Two Long-Run Players," Econometrica, Econometric Society, vol. 65(5), pages 1153-1174, September.
    2. David Kreps & Robert Wilson, 1999. "Reputation and Imperfect Information," Levine's Working Paper Archive 238, David K. Levine.
    3. Dodgson, J. S. & Newton, C. R. & Katsoulacos, Y., 1992. "A modelling framework for the empirical analysis of predatory behaviour in the bus services industry," Regional Science and Urban Economics, Elsevier, vol. 22(1), pages 51-70, March.
    4. Drew Fudenberg & David K. Levine, 1995. "Reputation and Equilibrium Selection in Games with a Patient Player," Levine's Working Paper Archive 103, David K. Levine.
    5. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
    6. Hendel, Igal, 1996. "Competition under Financial Distress," Journal of Industrial Economics, Wiley Blackwell, vol. 44(3), pages 309-24, September.
    7. Shepherd, William G, 1984. ""Contestability" vs. Competition," American Economic Review, American Economic Association, vol. 74(4), pages 572-87, September.
    8. Fudenberg, Drew & Tirole, Jean, 1991. "Perfect Bayesian equilibrium and sequential equilibrium," Journal of Economic Theory, Elsevier, vol. 53(2), pages 236-260, April.
    9. Paul Milgrom & John Roberts, 1997. "Predation, reputation , and entry deterrence," Levine's Working Paper Archive 1460, David K. Levine.
    10. Schmidt, K.M., 1992. "Reputation and Equilibrium Characterization in Repeated Games with Conflicting Interests," Working papers 92-7, Massachusetts Institute of Technology (MIT), Department of Economics.
    11. Jean-Pierre Benoit, 1984. "Financially Constrained Entry in a Game with Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 490-499, Winter.
    12. Masso, Jordi, 1996. "A Note on Reputation: More on the Chain-Store Paradox," Games and Economic Behavior, Elsevier, vol. 15(1), pages 55-81, July.
    13. Cripps, Martin W & Thomas, Jonathan P, 1995. "Reputation and Commitment in Two-Person Repeated Games without Discounting," Econometrica, Econometric Society, vol. 63(6), pages 1401-19, November.
    14. Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, vol. 80(1), pages 93-106, March.
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