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Restricting entry without aggressive pricing

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  • Alfaro, Martin
  • Lander, David

Abstract

This paper studies a strategic-investment model under endogenous entry of followers. We extend the standard setting à la Etro by incorporating multiple heterogeneous leaders and demand-enhancing investments directly affecting competition. Our findings indicate that all leaders simultaneously restrict entry without harming each other. Moreover, while entry accommodation never arises, a wide range of strategies is consistent with aggressive behavior, including quality upgrades exclusively targeted to high-valuation consumers. By using the tools of aggregative games, we provide conditions over demand primitives to identify when a leader over-invests and whether it (i) raises or lowers its price, (ii) increases or decreases its revenue, and (iii) supplies greater or lower quantities. We illustrate the results by completely characterizing outcomes under the Logit and CES demands.

Suggested Citation

  • Alfaro, Martin & Lander, David, 2021. "Restricting entry without aggressive pricing," Research in Economics, Elsevier, vol. 75(4), pages 305-319.
  • Handle: RePEc:eee:reecon:v:75:y:2021:i:4:p:305-319
    DOI: 10.1016/j.rie.2021.08.001
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    Cited by:

    1. Federico Etro, 2023. "Hybrid Marketplaces with Free Entry of Sellers," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 62(2), pages 119-148, March.
    2. Etro, Federico, 2023. "Platform competition with free entry of sellers," International Journal of Industrial Organization, Elsevier, vol. 89(C).
    3. Martin Alfaro, 2020. "On Strategic Investments by Leader Firms under Endogenous Entry and Quantity Competition," Economics Bulletin, AccessEcon, vol. 40(4), pages 3231-3240.

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    More about this item

    Keywords

    Demand-enhancing investments; Leaders; Endogenous entry; Free entry; Aggregative games;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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