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Entry deterrence and experimentation under demand uncertainty

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  • Jain, Neelam

Abstract

We examine the effect of a threat of entry on experimentation about demand by an incumbent monopolist when there is a fixed cost of entry. We show that experimentation may itself be used as a tool for entry deterrence and derive conditions under which experimentation reduces the probability of entry. These conditions depend on the entry rule which in turn depends on entry costs. We show that if experimentation does not deter entry, the monopolist incumbent experiments less. We also characterize experimentation and entry in the linear-uniform example, and show that cost of entry and experimentation do not have a monotonic relationship.

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  • Jain, Neelam, 2011. "Entry deterrence and experimentation under demand uncertainty," International Journal of Industrial Organization, Elsevier, vol. 29(4), pages 464-472, July.
  • Handle: RePEc:eee:indorg:v:29:y:2011:i:4:p:464-472
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    References listed on IDEAS

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    1. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, January.
    2. Neelam Jain & Thomas Jeitschko & Leonard Mirman, 2005. "Entry deterrence under financial intermediation with private information and hidden contracts," Review of Economic Design, Springer;Society for Economic Design, vol. 9(3), pages 203-225, August.
    3. Dimitrova, Magdalena & Schlee, Edward E., 2003. "Monopoly, competition and information acquisition," International Journal of Industrial Organization, Elsevier, vol. 21(10), pages 1623-1642, December.
    4. Mirman Leonard J. & Samuelson Larry & Schlee Edward E., 1994. "Strategic Information Manipulation in Duopolies," Journal of Economic Theory, Elsevier, vol. 62(2), pages 363-384, April.
    5. Dolores Alepuz, M. & Urbano, Amparo, 1999. "Duopoly experimentation: Cournot competition," Mathematical Social Sciences, Elsevier, vol. 37(2), pages 165-188, March.
    6. Neelam Jain & Thomas D. Jeitschko & Leonard J. Mirman, 2003. "Financial intermediation and entry-deterrence," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 22(4), pages 793-815, November.
    7. Mirman, Leonard J & Samuelson, Larry & Urbano, Amparo, 1993. "Monopoly Experimentation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(3), pages 549-563, August.
    8. Matthews, Steven A & Mirman, Leonard J, 1983. "Equilibrium Limit Pricing: The Effects of Private Information and Stochastic Demand," Econometrica, Econometric Society, vol. 51(4), pages 981-996, July.
    9. Belleflamme, Paul & Bloch, Francis, 2001. "Price and quantity experimentation: A synthesis," International Journal of Industrial Organization, Elsevier, vol. 19(10), pages 1563-1582, December.
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    Keywords

    Entry Experimentation Learning;

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