IDEAS home Printed from https://ideas.repec.org/a/bpj/bejeap/v11y2011i1n73.html
   My bibliography  Save this article

Are Entry Threats Always Credible?

Author

Listed:
  • Dasgupta Utteeyo

    (Franklin and Marshall College)

Abstract

This paper studies the efficacy of entry threats in a contestable environment using experiments. It is hypothesized here that the entrant firm’s home market profits influence the entrant’s competitive behavior even when entry is costless and completely reversible. In the experiment, entrants and incumbents tacitly collude when each has its own monopoly market. In contrast, an entrant from a competitive market practices hit-and-run entry whenever such opportunities exist, forcing the incumbent monopolist to price at average cost. The experiment results suggest that the usefulness of hit-and-run competitive threat in a contestable environment depends crucially on the relative profits in the entrant’s and the incumbent’s home and entry markets.

Suggested Citation

  • Dasgupta Utteeyo, 2011. "Are Entry Threats Always Credible?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-41, December.
  • Handle: RePEc:bpj:bejeap:v:11:y:2011:i:1:n:73
    DOI: 10.2202/1935-1682.2713
    as

    Download full text from publisher

    File URL: https://doi.org/10.2202/1935-1682.2713
    Download Restriction: For access to full text, subscription to the journal or payment for the individual article is required.

    File URL: https://libkey.io/10.2202/1935-1682.2713?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Weitzman, Martin L, 1983. "Contestable Markets: An Uprising in the Theory of Industry Structure: Comment," American Economic Review, American Economic Association, vol. 73(3), pages 486-487, June.
    2. Baumol, William J, 1982. "Contestable Markets: An Uprising in the Theory of Industry Structure," American Economic Review, American Economic Association, vol. 72(1), pages 1-15, March.
    3. van Wegberg, Marc & van Witteloostuijn, Arjen, 1992. "Credible Entry Threats into Contestable Markets: A Symmetric Multi-market Model of Contestability," Economica, London School of Economics and Political Science, vol. 59(236), pages 437-452, November.
    4. Selten, Reinhard & Stoecker, Rolf, 1986. "End behavior in sequences of finite Prisoner's Dilemma supergames A learning theory approach," Journal of Economic Behavior & Organization, Elsevier, vol. 7(1), pages 47-70, March.
    5. Wolfgang Briglauer & Kurt Reichinger, 2008. "Chances of Contestability in Communications," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 43(1), pages 51-64, January.
    6. Cairns, Robert D & Mahabir, Dhanayshar, 1988. "Contestability: A Revisionist View," Economica, London School of Economics and Political Science, vol. 55(218), pages 269-276, May.
    7. Jan Potters & Sigrid Suetens, 2009. "Cooperation in Experimental Games of Strategic Complements and Substitutes," Review of Economic Studies, Oxford University Press, vol. 76(3), pages 1125-1147.
    8. Harrison, Glenn W., 1988. "Predatory pricing in a multiple market experiment : A note," Journal of Economic Behavior & Organization, Elsevier, vol. 9(4), pages 405-417, June.
    9. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
    10. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716.
    11. 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.
    12. Dufwenberg, Martin & Gneezy, Uri, 2000. "Price competition and market concentration: an experimental study," International Journal of Industrial Organization, Elsevier, vol. 18(1), pages 7-22, January.
    13. Martin J. Osborne & Ariel Rubinstein, 1994. "A Course in Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262650401.
    14. Jeffrey M. Wooldridge, 2003. "Cluster-Sample Methods in Applied Econometrics," American Economic Review, American Economic Association, vol. 93(2), pages 133-138, May.
    15. 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.
    16. Kahn, Lawrence M. & Murnighan, J. Keith, 1993. "Conjecture, uncertainty, and cooperation in prisoner's dilemma games : Some experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 22(1), pages 91-117, September.
    17. Glenn W. Harrison & Michael McKee, 1985. "Monopoly Behavior, Decentralized Regulation, and Contestable Markets: An Experimental Evaluation," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 51-69, Spring.
    18. Ambrus, Attila & Pathak, Parag A., 2011. "Cooperation over finite horizons: A theory and experiments," Journal of Public Economics, Elsevier, vol. 95(7), pages 500-512.
    19. Dan Lovallo & Colin Camerer, 1999. "Overconfidence and Excess Entry: An Experimental Approach," American Economic Review, American Economic Association, vol. 89(1), pages 306-318, March.
    20. Isaac, R Mark & Smith, Vernon L, 1985. "In Search of Predatory Pricing," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 320-345, April.
    21. Martin Beckenkamp & Heike Hennig-Schmidt & Frank P. Maier-Rigaud, 2007. "Cooperation in Symmetric and Asymmetric Prisoner's Dilemma Games," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2006_25, Max Planck Institute for Research on Collective Goods.
    22. Dufwenberg, Martin & Gneezy, Uri, 2000. "Price competition and market concentration: an experimental study," International Journal of Industrial Organization, Elsevier, vol. 18(1), pages 7-22, January.
    23. Andreoni, James A & Miller, John H, 1993. "Rational Cooperation in the Finitely Repeated Prisoner's Dilemma: Experimental Evidence," Economic Journal, Royal Economic Society, vol. 103(418), pages 570-585, May.
    24. Paul J. Healy, 2007. "Group Reputations, Stereotypes, and Cooperation in a Repeated Labor Market," American Economic Review, American Economic Association, vol. 97(5), pages 1751-1773, December.
    25. Roe, Brian E. & Wu, Steven Y., 2009. "Do the Selfish Mimic Cooperators? Experimental Evidence from Finitely-Repeated Labor Markets," IZA Discussion Papers 4084, Institute of Labor Economics (IZA).
    26. Schwartz, Marius & Reynolds, Robert J, 1983. "Contestable Markets: An Uprising in the Theory of Industry Structure: Comment," American Economic Review, American Economic Association, vol. 73(3), pages 488-490, June.
    27. Coursey, Don & Isaac, R Mark & Smith, Vernon L, 1984. "Natural Monopoly and Contested Markets: Some Experimental Results," Journal of Law and Economics, University of Chicago Press, vol. 27(1), pages 91-113, April.
    28. H. Semih Yildirim & George C. Philippatos, 2007. "Competition and contestability in Central and Eastern European banking markets," Managerial Finance, Emerald Group Publishing, vol. 33(3), pages 195-209, February.
    29. James C. Cox & R. Mark Isaac, 1987. "Mechanisms for Incentive Regulation: Theory and Experiment," RAND Journal of Economics, The RAND Corporation, vol. 18(3), pages 348-359, Autumn.
    30. J. Keith Murnighan & Alvin E. Roth, 1983. "Expecting Continued Play in Prisoner's Dilemma Games," Journal of Conflict Resolution, Peace Science Society (International), vol. 27(2), pages 279-300, June.
    31. Mason, Charles F & Phillips, Owen R & Nowell, Clifford, 1992. "Duopoly Behavior in Asymmetric Markets: An Experimental Evaluation," The Review of Economics and Statistics, MIT Press, vol. 74(4), pages 662-670, November.
    32. Langridge, R. & Sealey, R., 2000. "Contestability in the UK bus industry? The National Bus Company, and the "Tilling Mark II" effect," Transport Policy, Elsevier, vol. 7(2), pages 105-115, April.
    33. Jamie L. Brown-Kruse, 1991. "Contestability in the Presence of an Alternate Market: An Experimental Examination," RAND Journal of Economics, The RAND Corporation, vol. 22(1), pages 136-147, Spring.
    34. Tom De Herdt, 2003. "Cooperation and fairness: the flood-Dresher experiment revisited," Review of Social Economy, Taylor & Francis Journals, vol. 61(2), pages 183-210.
    35. Cedric Laguerre, 2009. "Is The Defence Market Contestable? The Case Of Military Aerospace," Defence and Peace Economics, Taylor & Francis Journals, vol. 20(4), pages 303-326.
    36. Brock, William A, 1983. "Contestable Markets and the Theory of Industry Structure: A Review Article," Journal of Political Economy, University of Chicago Press, vol. 91(6), pages 1055-1066, December.
    37. J.P. Sheposh & P.S. Gallo JR, 1973. "Asymmetry of Payoff Structure and Cooperative Behavior in the Prisoner's Dilemma Game," Journal of Conflict Resolution, Peace Science Society (International), vol. 17(2), pages 321-333, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Baulia, Susmita, 2019. "Take-up of joint and individual liability loans: An analysis with laboratory experiment," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 82(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. van Damme, E.E.C. & Larouche, P. & Müller, W., 2006. "Abuse of a Dominant Position : Cases and Experiments," Other publications TiSEM 7e471876-96e7-46c7-a956-e, Tilburg University, School of Economics and Management.
    2. Jim Engle-Warnick & Bradley Ruffle, 2002. "Buyer Countervailing Power versus Monopoly Power: Evidence from Experimental Posted-Offer Markets," Economics Papers 2002-W14, Economics Group, Nuffield College, University of Oxford.
    3. Subhasish Dugar & Arnab Mitra, 2016. "Bertrand Competition With Asymmetric Marginal Costs," Economic Inquiry, Western Economic Association International, vol. 54(3), pages 1631-1647, July.
    4. Buchheit, Steve & Feltovich, Nick, 2010. "Experimental evidence of a sunk–cost paradox: a study of pricing behavior in Bertrand–Edgeworth duopoly," SIRE Discussion Papers 2010-124, Scottish Institute for Research in Economics (SIRE).
    5. Argenton, Cédric & Müller, Wieland, 2012. "Collusion in experimental Bertrand duopolies with convex costs: The role of cost asymmetry," International Journal of Industrial Organization, Elsevier, vol. 30(6), pages 508-517.
    6. 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.
    7. Leufkens, Kasper & Peeters, Ronald, 2011. "Price dynamics and collusion under short-run price commitments," International Journal of Industrial Organization, Elsevier, vol. 29(1), pages 134-153, January.
    8. Jan Potters & Sigrid Suetens, 2013. "Oligopoly Experiments In The Current Millennium," Journal of Economic Surveys, Wiley Blackwell, vol. 27(3), pages 439-460, July.
    9. Potters, Jan & Suetens, Sigrid, 2020. "Optimization incentives in dilemma games with strategic complementarity," European Economic Review, Elsevier, vol. 127(C).
    10. Butler, Jeffrey V. & Carbone, Enrica & Conzo, Pierluigi & Spagnolo, Giancarlo, 2020. "Past performance and entry in procurement: An experimental investigation," Journal of Economic Behavior & Organization, Elsevier, vol. 173(C), pages 179-195.
    11. Brennan, Timothy J., 2000. "The Economics of Competition Policy: Recent Developments and Cautionary Notes in Antitrust and Regulation," Discussion Papers 10716, Resources for the Future.
    12. Mago, Shakun Datta & Pate, Jennifer G., 2009. "An experimental examination of competitor-based price matching guarantees," Journal of Economic Behavior & Organization, Elsevier, vol. 70(1-2), pages 342-360, May.
    13. Bruttel, Lisa & Fischbacher, Urs, 2013. "Taking the initiative. What characterizes leaders?," European Economic Review, Elsevier, vol. 64(C), pages 147-168.
    14. Ralph-C Bayer & Changxia Ke, 2010. "Rockets and Feathers in the Laboratory," School of Economics Working Papers 2010-20, University of Adelaide, School of Economics.
    15. Urs Fischbacher & Simon Gachter, 2010. "Social Preferences, Beliefs, and the Dynamics of Free Riding in Public Goods Experiments," American Economic Review, American Economic Association, vol. 100(1), pages 541-556, March.
    16. Darai, D. & Roux, C. & Schneider, F., 2019. "Mergers, Mavericks, and Tacit Collusion," Cambridge Working Papers in Economics 1984, Faculty of Economics, University of Cambridge.
    17. Urs Fischbacher & Simon Gachter, 2010. "Social Preferences, Beliefs, and the Dynamics of Free Riding in Public Goods Experiments," American Economic Review, American Economic Association, vol. 100(1), pages 541-556, March.
    18. Urs Fischbacher & Simon Gaechter, 2008. "Heterogeneous Social Preferences And The Dynamics Of Free Riding In Public Good Experiments," Discussion Papers 2008-07, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
    19. Christodoulos Stefanadis, 2003. "Sunk Costs, Contestability, and the Latent Contract Market," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 12(1), pages 119-138, March.
    20. Daniel Cracau & Benjamin Franz, 2014. "An experimental test of the mixed strategy equilibrium in price-quantity oligopolies," Economics Bulletin, AccessEcon, vol. 34(3), pages 1369-1380.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bpj:bejeap:v:11:y:2011:i:1:n:73. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://www.degruyter.com .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Peter Golla (email available below). General contact details of provider: https://www.degruyter.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.