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Technology Inertia and the Benefits of Entry

Author

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  • Bacchiega Emanuele

    (Alma Mater Studiorum - Università di Bologna)

  • Garella Paolo G.

    (Università degli Studi di Milano)

Abstract

We study the effects of entry on price in an industry. This assessment is usually carried out under the implicit assumption of “technological inertia”: incumbents cannot change their technologies in response to entry. We remove this assumption by modeling a game where, before quantity competition, firms choose technologies. We identify parameter configurations where, after entry, the incumbent(s) changes technology. This leads either to a higher price after entry or to a “dampening effect” on price reduction. This effect is shown to be relevant when evaluating the welfare gains from measures intended to foster competition by increasing the number of competitors. The converse proposition could be stated for evaluating the social costs of mergers.

Suggested Citation

  • Bacchiega Emanuele & Garella Paolo G., 2012. "Technology Inertia and the Benefits of Entry," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 12(1), pages 1-18, March.
    • Handle: RePEc:bpj:bejeap:v:12:y:2012:i:1:n:9
    DOI: 10.1515/1935-1682.3133
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    References listed on IDEAS

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    1. Stephen W. Salant & Sheldon Switzer & Robert J. Reynolds, 1983. "Losses From Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 98(2), pages 185-199.
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