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Monopoly rents in contestable markets

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  • Braido, Luis H.B.
  • Shalders, Felipe L.

Abstract

Random choices of prices and product characteristics can be used by a contestable monopolist to deter entry and fully extract the monopoly rent. We develop this idea in a model of Bertrand price competition. In equilibrium, one firm enters the market and makes choices that are unpredictable to its competitors. This prevents price undercuts and keeps other firms out of the market. The entrant firm collects the monopoly rent despite the existence of potential competitors. This result raises an alert for regulatory practices based on the conventional wisdom that contestability is associated with low prices and profits.

Suggested Citation

  • Braido, Luis H.B. & Shalders, Felipe L., 2015. "Monopoly rents in contestable markets," Economics Letters, Elsevier, vol. 130(C), pages 89-92.
    • Handle: RePEc:eee:ecolet:v:130:y:2015:i:c:p:89-92
    DOI: 10.1016/j.econlet.2015.03.008
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    References listed on IDEAS

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    1. 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.
    2. Baumol, William J & Willig, Robert D, 1986. "Contestability: Developments since the Book," Oxford Economic Papers, Oxford University Press, vol. 38(0), pages 9-36, Suppl. No.
    3. Braido, Luis H.B., 2009. "Multiproduct price competition with heterogeneous consumers and nonconvex costs," Journal of Mathematical Economics, Elsevier, vol. 45(9-10), pages 526-534, September.
    4. Dixit, Avinash, 1982. "Recent Developments in Oligopoly Theory," American Economic Review, American Economic Association, vol. 72(2), pages 12-17, May.
    5. Sharkey, William W. & Sibley, David S., 1993. "A Bertrand model of pricing and entry," Economics Letters, Elsevier, vol. 41(2), pages 199-206.
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    Cited by:

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    2. Kęstutis Peleckis, 2022. "Application of the Fuzzy VIKOR Method to Assess Concentration and Its Effects on Competition in the Energy Sector," Energies, MDPI, vol. 15(4), pages 1-16, February.

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    More about this item

    Keywords

    Contestable markets; Monopoly; Profit; Price competition; Mixed strategy; Entry barrier;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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