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Entry Deterrence in a Duopoly Market

Author

Listed:
  • Dana James D.

    () (Kellogg School of Management, Northwestern University)

  • Spier Kathryn E.

    () (Kellogg School of Management and School of Law, Northwestern University and NBER)

Abstract

In a homogeneous good, Cournot duopoly model, entry may occur even when the potential entrant has no cost advantage and no independent access to distribution. By sinking its costs of production before negotiating with the incumbents, the entrant creates an externality that induces the incumbents to bid more aggressively for the distribution rights to its output. Each incumbent is willing to pay up to the incremental profit earned from the additional output plus the incremental loss avoided by keeping the output away from its rival. This implies that the incumbents are willing to pay up to the market price for each unit of available output. A sequential game in which the incumbents produce first is analyzed, and the conditions under which entry is deterred by incumbents' preemptive capacity expansions are derived.

Suggested Citation

  • Dana James D. & Spier Kathryn E., 2007. "Entry Deterrence in a Duopoly Market," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 7(1), pages 1-37, April.
  • Handle: RePEc:bpj:bejeap:v:7:y:2007:i:1:n:19
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    Cited by:

    1. Péter Eső & Volker Nocke & Lucy White, 2010. "Competition for scarce resources," RAND Journal of Economics, RAND Corporation, vol. 41(3), pages 524-548, September.

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