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The dynamic annihilation of a rational competitive fringe by a low-cost dominant firm

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  • Berck, Peter
  • Perloff, Jeffrey M.

Abstract

A low-cost dominant firm will drive all competitive fringe firms out of the market if all firms have rational expectations; however, the dominant firm will not predate (price below marginal cost). Since a dominant firm will not drive out fringe firms if they have myopic expectations it may be in the dominant firm's best interests to inform the fringe. The effects of governmental intervention on the optimal path and welfare are presented.
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Suggested Citation

  • Berck, Peter & Perloff, Jeffrey M., 1988. "The dynamic annihilation of a rational competitive fringe by a low-cost dominant firm," Journal of Economic Dynamics and Control, Elsevier, vol. 12(4), pages 659-678, November.
  • Handle: RePEc:eee:dyncon:v:12:y:1988:i:4:p:659-678
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    References listed on IDEAS

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    1. Kamien, Morton I & Schwartz, Nancy L, 1971. "Limit Pricing and Uncertain Entry," Econometrica, Econometric Society, vol. 39(3), pages 441-454, May.
    2. Therese Flaherty, M., 1980. "Dynamic limit pricing, barriers to entry, and rational firms," Journal of Economic Theory, Elsevier, vol. 23(2), pages 160-182, October.
    3. De Bondt, Raymond R, 1976. "Limit Pricing, Uncertain Entry, and the Entry Lag," Econometrica, Econometric Society, vol. 44(5), pages 939-946, September.
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    Cited by:

    1. Holmes, Thomas J., 1996. "Can consumers benefit from a policy limiting the market share of a dominant firm?," International Journal of Industrial Organization, Elsevier, vol. 14(3), pages 365-387, May.
    2. Toxvaerd, Flavio, 2010. "Dynamic Limit Pricing," CEPR Discussion Papers 8104, C.E.P.R. Discussion Papers.
    3. Ashiya, Masahiro, 2000. "Weak entrants are welcome," International Journal of Industrial Organization, Elsevier, vol. 18(6), pages 975-984, August.
    4. Susanne Wied-Nebbeling, 2007. "Fringe firms: Are they better off in a heterogeneous market?," Working Paper Series in Economics 31, University of Cologne, Department of Economics.
    5. Emin M. Dinlersoz, 2000. "Firm Organization and Retail Industry Dynamics," Econometric Society World Congress 2000 Contributed Papers 0005, Econometric Society.

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